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Should Central Banks Respond to the Persistence of Shocks?

Author

Listed:
  • Jean-Bernard Chatelain
  • Kirsten Ralf

Abstract

If there is a non-negligible sensitivity of inflation to demand or supply exogenous and highly persistent shocks (which are not nearly fully damped in six quarters), it is optimal for central banks policy instrument to respond not only to inflation deviation from its target but also, in addition, to respond relatively more to this shock, the more it is persistent, and early enough. This policy instrument distinct response to persistent shocks in addition to its response to inflation is optimal because it decreases the sensitivity of inflation to the persistent shock. Then, inflation converges to its long run target faster than the highly persistent exogenous shock.

Suggested Citation

  • Jean-Bernard Chatelain & Kirsten Ralf, 2025. "Should Central Banks Respond to the Persistence of Shocks?," Annals of Economics and Statistics, GENES, issue 160, pages 15-34.
    • Handle: RePEc:adr:anecst:y:2025:i:160:p:15-34
    DOI: 10.2307/48857611
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    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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