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Learning The Inflation Target

  • Nunes, Ricardo

The New Keynesian model with rational expectations unrealistically predicts that unanticipated credible changes in the inflation target lead to an immediate jump in the inflation level while the output gap is unaffected. We set up a theoretical model where agents learn the behaviour of the economy. In this context, a permanent change in the inflation target leads inflation to respond sluggishly while the output gap is temporarily affected. We extend the model to allow for both learners and forward looking agents to coexist. The calibrated model explains quite well transition dynamics during the Volker disinflation.

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Article provided by Cambridge University Press in its journal Macroeconomic Dynamics.

Volume (Year): 13 (2009)
Issue (Month): 02 (April)
Pages: 167-188

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Handle: RePEc:cup:macdyn:v:13:y:2009:i:02:p:167-188_07
Contact details of provider: Postal: Cambridge University Press, UPH, Shaftesbury Road, Cambridge CB2 8BS UK
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  1. Albert Marcet & Juan P. Nicolini, 2003. "Recurrent Hyperinflations and Learning," American Economic Review, American Economic Association, vol. 93(5), pages 1476-1498, December.
  2. Evans, George W. & Honkapohja, Seppo & Marimon, Ramon, 1996. "Convergence in Monetary Inflation Models with Heterogeneous Learning Rules," CEPR Discussion Papers 1310, C.E.P.R. Discussion Papers.
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  7. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
  8. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," CEPR Discussion Papers 1908, C.E.P.R. Discussion Papers.
  9. Roberts, John M, 1995. "New Keynesian Economics and the Phillips Curve," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 975-84, November.
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  19. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-11, July.
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  22. Evans, George W & Honkapohja, Seppo, 1998. "Economic Dynamics with Learning: New Stability Results," Review of Economic Studies, Wiley Blackwell, vol. 65(1), pages 23-44, January.
  23. Marcet, Albert & Sargent, Thomas J, 1989. "Convergence of Least-Squares Learning in Environments with Hidden State Variables and Private Information," Journal of Political Economy, University of Chicago Press, vol. 97(6), pages 1306-22, December.
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