Inflationary Sentiments and Monetary Policy Communcation
AbstractWe develop a DSGE model in which the conduct of monetary policy influences agents' inflationary sentiments, defined as waves of pessimism about how aggressively the central bank will react to inflation in the future. Monetary policy alternates periods of active inflation stabilization (i.e., active regime) and periods during which the emphasis is mainly on output stabilization (i.e., passive regime). Deviations from the active regime can be long or short lasting. When observing passive monetary policy, agents do not know the nature of the deviation and have to learn which type of passive regime is in place. As the central bank deviates from the active monetary policy for a longer and longer period, inflationary sentiments progressively spread among agents, who get increasingly convinced that the central bank might have switched to the long-lasting passive regime. Mounting inflationary sentiments have the effect to make the inflation-output gap trade-off worse and to depress private sector's welfare. When the model is calibrated to U.S. data, we find that inflationary sentiments sluggishly rise as the Federal Reserve deviates from active monetary policy. Such a dynamic for sentiments implies that (i) inflation drifts up for several years in response to a cost-push shock and (ii) the Federal Reserve has a large leeway in accommodating this type of shocks. Increasing the transparency of the Federal Reserve is found to improve welfare by anchoring inflationary sentiments. Gains from transparency are even more sizeable in periods when the persistence of shocks is high and for countries whose central bank has failed establishing a strong commitment to keeping inflation under control.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Society for Economic Dynamics in its series 2012 Meeting Papers with number 893.
Date of creation: 2012
Date of revision:
Contact details of provider:
Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
Web page: http://www.EconomicDynamics.org/society.htm
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Rodriguez-Palenzuela, Diego & Castelnuovo, Efrem & Nicoletti-Altimari, Sergio, 2003. "Definition of price stability, range and point inflation targets: the anchoring of long-term inflation expectations," Working Paper Series 0273, European Central Bank.
- Troy Davig & Eric M. Leeper, 2005.
"Generalizing the Taylor principle,"
Research Working Paper
RWP 05-13, Federal Reserve Bank of Kansas City.
- Troy Davig & Eric M. Leeper, 2005. "Generalizing the Taylor Principle," NBER Working Papers 11874, National Bureau of Economic Research, Inc.
- Troy Davig & Eric M. Leeper, 2006. "Generalizing the Taylor Principle," Caepr Working Papers 2006-001, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.
- Christopher A. Sims & Tao Zha, 2004.
"Were there regime switches in U.S. monetary policy?,"
2004-14, Federal Reserve Bank of Atlanta.
- Christopher A. Sims & Tao Zha, 2006. "Were There Regime Switches in U.S. Monetary Policy?," American Economic Review, American Economic Association, vol. 96(1), pages 54-81, March.
- Christopher A. Sims & Tao Zha, 2005. "Were There Regime Switches in U.S. Monetary Policy?," Working Papers 92, Princeton University, Department of Economics, Center for Economic Policy Studies..
- Thomas A. Lubik & Frank Schorfheide, 2004.
"Testing for Indeterminacy: An Application to U.S. Monetary Policy,"
American Economic Review,
American Economic Association, vol. 94(1), pages 190-217, March.
- Thomas Lubik & Frank Schorfheide, 2002. "Testing for Indeterminacy:An Application to U.S. Monetary Policy," Economics Working Paper Archive 480, The Johns Hopkins University,Department of Economics, revised Jun 2003.
- Farmer, Roger E.A. & Waggoner, Daniel F. & Zha, Tao, 2009.
"Understanding Markov-switching rational expectations models,"
Journal of Economic Theory,
Elsevier, vol. 144(5), pages 1849-1867, September.
- Roger E.A. Farmer & Daniel F. Waggoner & Tao Zha, 2009. "Understanding Markov-switching rational expectations models," Working Paper 2009-05, Federal Reserve Bank of Atlanta.
- Roger E.A. Farmer & Tao Zha & Daniel F. Waggoner, 2009. "Understanding Markov-Switching Rational Expectations Models," NBER Working Papers 14710, National Bureau of Economic Research, Inc.
- Francesco Bianchi, 2012.
"Regime Switches, Agents’ Beliefs, and Post-World War II U.S. Macroeconomic Dynamics,"
12-04, Duke University, Department of Economics.
- Francesco Bianchi, 2010. "Regime Switches, Agents' Beliefs, and Post-World War II U.S. Macroeconomic Dynamics," Working Papers 10-39, Duke University, Department of Economics.
- Bianchi, Francesco, 2008. "Regime switches, Agents’ Beliefs, and Post-World War II U.S. Macroeconomic Dynamics," MPRA Paper 24251, University Library of Munich, Germany, revised 19 Jan 2010.
- Francesco Bianchi, 2009. "Regime Switches, Agents’ Beliefs, and Post-World War II U.S. Macroeconomic Dynamics," 2009 Meeting Papers 198, Society for Economic Dynamics.
- Frank Schorfheide, 2005.
"Learning and Monetary Policy Shifts,"
Review of Economic Dynamics,
Elsevier for the Society for Economic Dynamics, vol. 8(2), pages 392-419, April.
- Timothy Cogley & Christian Matthes & Argia M. Sbordone, 2011.
"Optimal disinflation under learning,"
524, Federal Reserve Bank of New York.
- Nimark, Kristoffer, 2008.
"Dynamic pricing and imperfect common knowledge,"
Journal of Monetary Economics,
Elsevier, vol. 55(2), pages 365-382, March.
- Leonardo Melosi, 2011. "Public's Inflation Expectations and Monetary Policy," 2011 Meeting Papers 1151, Society for Economic Dynamics.
- Giorgio E. Primiceri, 2005. "Time Varying Structural Vector Autoregressions and Monetary Policy," Review of Economic Studies, Oxford University Press, vol. 72(3), pages 821-852.
- Leonardo Melosi, 2012.
"Signaling effects of monetary policy,"
Working Paper Series
WP-2012-05, Federal Reserve Bank of Chicago.
- Klodiana Istrefi & Anamaria Piloiu, 2013. "Economic Policy Uncertainty, Trust and Inflation Expectations," CESifo Working Paper Series 4294, CESifo Group Munich.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann).
If references are entirely missing, you can add them using this form.