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Inflation Target Transparency and the Macroeconomy

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  • Melecky, Martin
  • Rodrıguez Palenzuela, Diego
  • Soderstrom, Ulf

Abstract

We quantify the effects of monetary policy transparency and credibility on macroeconomic volatility in an estimated model of the euro area economy. In our model, private agents are unable to distinguish between temporary shocks to the central bank’s monetary policy rule and persistent shifts in the inflation target, and therefore use optimal filtering techniques to construct estimates of the future monetary policy stance. We find that the macroeconomic benefits of credibly announcing the current level of the time-varying inflation target are reasonably small as long as private agents correctly understand the stochastic processes governing the inflation target and the temporary policy shock. If, on the other hand, private agents overestimate the volatility of the inflation target, the overall gains of announcing the target can be substantial. We also show that the central bank to some extent can help private agents in their learning process by responding more aggressively to deviations of inflation from the target.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 10545.

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Date of creation: 2008
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Handle: RePEc:pra:mprapa:10545

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Keywords: Credibility; Transparency; Inflation targeting; Imperfect information; Private sector learning;

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Citations

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Cited by:
  1. Fève,P. & Matheron,J. & Sahuc, J-G., 2009. "Inflation Target Shocks and Monetary Policy Inertia in the Euro Area," Working papers 243, Banque de France.
  2. Paul Levine & Joseph Pearlman & Bo Yang, 2012. "Imperfect Information, Optimal Monetary Policy and Informational Consistency," School of Economics Discussion Papers 1012, School of Economics, University of Surrey.
  3. Valdivia, Daney & Loayza, Lilian, 2010. "Adopción de metas de inflación y su impacto en las expectativas de inflación y volatilidad del crecimiento económico: evidencia empírica para Bolivia
    [Inflation targeting and its impact on the
    ," MPRA Paper 37328, University Library of Munich, Germany, revised 25 Aug 2011.
  4. Aleš Melecký & Martin Melecký, 2012. "The Impact of Macroeconomic Shocks on the Government Debt Dynamics: How Robust is the Fiscal Stance of the Czech Republic?," Politická ekonomie, University of Economics, Prague, vol. 2012(6), pages 723-742.
  5. Marco Del Negro & Stefano Eusepi, 2010. "Fitting observed inflation expectations," Staff Reports 476, Federal Reserve Bank of New York.
  6. Krause, Michael U. & Moyen, Stéphane, 2013. "Public debt and changing inflation targets," Discussion Papers 06/2013, Deutsche Bundesbank, Research Centre.

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