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A note on expectational stability under non-zero trend inflation

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  • Kobayashi, Teruyoshi
  • Muto, Ichiro

Abstract

This study examines the expectational stability of the rational expectations equilibria (REE) under alternative Taylor rules when trend inflation is non-zero. We find that when trend inflation is high, the REE is likely to be expectationally unstable. This result holds true regardless of the nature of the data (such as contemporaneous data, forecast, and lagged data) introduced in the Taylor rule. Our results suggest that a high macroeconomic volatility during the period of high trend inflation can be well explained by introducing the concept of expectational stability.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 22952.

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Date of creation: 28 May 2010
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Handle: RePEc:pra:mprapa:22952

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Keywords: adaptive learning; E-stability; Taylor rule; trend inflation;

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References

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  1. Kaushik Mitra & Seppo Honkapohja, 2004. "Performance of Monetary Policy with Internal Central Bank Forecasting," Royal Holloway, University of London: Discussion Papers in Economics, Department of Economics, Royal Holloway University of London 04/18, Department of Economics, Royal Holloway University of London, revised Jul 2004.
  2. Bennett T. McCallum, 1997. "Issues in the Design of Monetary Policy Rules," NBER Working Papers 6016, National Bureau of Economic Research, Inc.
  3. Ascari, Guido, 2003. "Staggered prices and trend inflation: some nuisances," Research Discussion Papers, Bank of Finland 27/2003, Bank of Finland.
  4. Giovanni Dell'Ariccia & Olivier J. Blanchard & Paolo Mauro, 2010. "Rethinking Macroeconomic Policy," IMF Staff Position Notes 2010/03, International Monetary Fund.
  5. Michael T. Kiley, 2007. "Is Moderate-to-High Inflation Inherently Unstable?," International Journal of Central Banking, International Journal of Central Banking, International Journal of Central Banking, vol. 3(2), pages 173-201, June.
  6. Guido Ascari & Tiziano Ropele, 2009. "Trend Inflation, Taylor Principle, and Indeterminacy," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 41(8), pages 1557-1584, December.
  7. Ichiro Muto, 2008. "Monetary Policy and Learning from the Central Bank's Forecast," IMES Discussion Paper Series 08-E-01, Institute for Monetary and Economic Studies, Bank of Japan.
  8. West, Kenneth D., 2007. "Comment on Argia M. Sbordone "Inflation persistence: Alternative interpretations and policy implications"," Journal of Monetary Economics, Elsevier, Elsevier, vol. 54(5), pages 1340-1343, July.
  9. Seppo Honkapohja, 2003. "Discussion of Preston, "Learning about monetary policy rules when long-horizon expectations matter"," Working Paper, Federal Reserve Bank of Atlanta 2003-19, Federal Reserve Bank of Atlanta.
  10. Bruce Preston, 2003. "Learning about monetary policy rules when long-horizon expectations matter," Working Paper, Federal Reserve Bank of Atlanta 2003-18, Federal Reserve Bank of Atlanta.
  11. Argia M. Sbordone, 2007. "Inflation persistence: alternative interpretations and policy implications," Staff Reports, Federal Reserve Bank of New York 286, Federal Reserve Bank of New York.
  12. Kaushik Mitra & James Bullard, . "Learning About Monetary Policy Rules," Discussion Papers, Department of Economics, University of York 00/41, Department of Economics, University of York.
  13. Yuriy Gorodnichenko & Olivier Coibion, 2009. "Monetary Policy, Trend Inflation and the Great Moderation: An Alternative Interpretation," 2009 Meeting Papers, Society for Economic Dynamics 21, Society for Economic Dynamics.
  14. Guido Ascari & Tiziano Ropele, 2007. "Optimal monetary policy under low trend inflation," Temi di discussione (Economic working papers), Bank of Italy, Economic Research and International Relations Area 647, Bank of Italy, Economic Research and International Relations Area.
  15. Timothy Cogley & Argia M. Sbordone, 2008. "Trend Inflation, Indexation, and Inflation Persistence in the New Keynesian Phillips Curve," American Economic Review, American Economic Association, American Economic Association, vol. 98(5), pages 2101-26, December.
  16. Seppo Honkapohja & Kaushik Mitra & George W. Evans, 2011. "Notes on Agents¡¯ Behavioral Rules Under Adaptive Learning and Studies of Monetary Policy," CDMA Working Paper Series, Centre for Dynamic Macroeconomic Analysis 201102, Centre for Dynamic Macroeconomic Analysis.
  17. Preston, Bruce, 2006. "Adaptive learning, forecast-based instrument rules and monetary policy," Journal of Monetary Economics, Elsevier, Elsevier, vol. 53(3), pages 507-535, April.
  18. Kurozumi, Takushi, 2014. "Trend inflation, sticky prices, and expectational stability," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 42(C), pages 175-187.
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Cited by:
  1. Kurozumi, Takushi, 2014. "Trend inflation, sticky prices, and expectational stability," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 42(C), pages 175-187.
  2. Tesfaselassie, Mewael F., 2014. "Trend growth and learning about monetary policy rules," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 41(C), pages 241-256.
  3. Guido Ascari & Argia M. Sbordone, 2013. "The Macroeconomics of Trend Inflation," DEM Working Papers Series 053, University of Pavia, Department of Economics and Management.
  4. Henning Weber, 2011. "Optimal inflation and firms' productivity dynamics," Kiel Working Papers 1685, Kiel Institute for the World Economy.
  5. Ichiro Muto, 2008. "Monetary Policy and Learning from the Central Bank's Forecast," IMES Discussion Paper Series 08-E-01, Institute for Monetary and Economic Studies, Bank of Japan.
  6. Guido Ascari & Anna Florio, 2012. "Transparency, Expectations Anchoring and the Inflation Target," DEM Working Papers Series 022, University of Pavia, Department of Economics and Management.
  7. Henning Weber, 2012. "The Optimal Inflation Rate and Firm-Level Productivity Growth," Kiel Working Papers 1773, Kiel Institute for the World Economy.
  8. Takushi Kurozumi & Willem Van Zandweghe, 2012. "Firm-specific labor, trend inflation, and equilibrium stability," Research Working Paper, Federal Reserve Bank of Kansas City RWP 12-09, Federal Reserve Bank of Kansas City.

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