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Inflation targets, credibility and persistence in a simple sticky-price framework

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  • Rudd, Jeremy
  • Whelan, Karl

Abstract

An important trend in macroeconomic research in recent years involves the increased use of optimization-based models with nominal rigidities (such as sticky prices) to analyse how monetary policy affects the economy and how optimal policy should be designed. This paper presents a re-formulated version of a commonly-used baseline sticky-price model that has been extended to account for variations over time in the central bank's inflation target. We derive a closed-form solution for the model and analyse its properties under various parameter values. The model is used to explore topics relating to the effects of disinflationary monetary policies and inflation persistence. In particular, we employ the model to illustrate and assess the critique that standard sticky-price models generate counterfactual predictions for the effects of monetary policy.

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File URL: http://researchrepository.ucd.ie/bitstream/10197/238/3/whelank_workpap_018.pdf
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Bibliographic Info

Paper provided by University College Dublin in its series Open Access publications from University College Dublin with number urn:hdl:10197/238.

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Date of creation: Aug 2003
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Handle: RePEc:ner:ucddub:urn:hdl:10197/238

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Web page: http://www.ucd.ie

Related research

Keywords: Inflation (Finance); Phillips curve; Monetary policy;

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  1. Devereux, Michael B & Yetman, James, 2001. "Predetermined Prices and the Persistent Effects of Money on Output," CEPR Discussion Papers 2917, C.E.P.R. Discussion Papers.
  2. Erceg, Christopher J. & Levin, Andrew T., 2003. "Imperfect credibility and inflation persistence," Journal of Monetary Economics, Elsevier, vol. 50(4), pages 915-944, May.
  3. Whelan, Karl, 2002. "A Guide to U.S. Chain Aggregated NIPA Data," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 48(2), pages 217-33, June.
  4. Richard Clarida & Jordi Gali & Mark Gertler, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," NBER Working Papers 7147, National Bureau of Economic Research, Inc.
  5. N. Gregory Mankiw, 2000. "The Inexorable and Mysterious Tradeoff Between Inflation and Unemployment," Harvard Institute of Economic Research Working Papers 1905, Harvard - Institute of Economic Research.
  6. Pivetta, Frederic & Reis, Ricardo, 2007. "The persistence of inflation in the United States," Journal of Economic Dynamics and Control, Elsevier, vol. 31(4), pages 1326-1358, April.
  7. Bernanke, Ben & Gertler, Mark, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," Working Papers 95-15, C.V. Starr Center for Applied Economics, New York University.
  8. Bennett T. McCallum, 2001. "Should Monetary Policy Respond Strongly to Output Gaps?," NBER Working Papers 8226, National Bureau of Economic Research, Inc.
  9. Ball, Laurence, 1995. "Disinflation with imperfect credibility," Journal of Monetary Economics, Elsevier, vol. 35(1), pages 5-23, February.
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Cited by:
  1. Luis F. Céspedes & Claudio Soto, 2007. "Credibility and Inflation Targeting in Chile," Central Banking, Analysis, and Economic Policies Book Series, in: Frederic S. Miskin & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Se (ed.), Monetary Policy under Inflation Targeting, edition 1, volume 11, chapter 14, pages 547-578 Central Bank of Chile.

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