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A Note On The Anchoring Effect Of Explicit Inflation Targets

  • Libich, Jan

Empirical literature provided convincing evidence that explicit (ie legislated) inflation targets anchor expectations. We propose a novel game theoretic framework with generalized timing that allows us to formally capture this beneficial anchoring effect. Using the framework we identify several factors that influence whether and how strongly expectations are anchored, namely: (i) the public’s cost of decision-making, (ii) the public’s inflation aversion, (iii) the slope of the Phillips curve, (iv) the magnitude of supply shocks, (v) the degree of central bank conservatism, and under many (but not all) circumstances, (vi) the explicitness of the inflation target.

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

Volume (Year): 13 (2009)
Issue (Month): 05 (November)
Pages: 685-697

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Handle: RePEc:cup:macdyn:v:13:y:2009:i:05:p:685-697_08
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  1. Svensson, Lars E.O. & Faust, John, 1998. "Transparency and Credibility: Monetary Policy with Unobservable Goals," Seminar Papers 636, Stockholm University, Institute for International Economic Studies.
  2. Clarida, R. & Gali, J. & Gertler, M., 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Working Papers 99-13, C.V. Starr Center for Applied Economics, New York University.
  3. Refet S. Gürkaynak & Brian Sack & Eric Swanson, 2005. "The Sensitivity of Long-Term Interest Rates to Economic News: Evidence and Implications for Macroeconomic Models," American Economic Review, American Economic Association, vol. 95(1), pages 425-436, March.
  4. Mankiw, N. Gregory & Reis, Ricardo, 2002. "Sticky Information Versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve," Scholarly Articles 3415324, Harvard University Department of Economics.
  5. James Tobin, 1982. "Money and Finance in the Macro-Economic Process," Cowles Foundation Discussion Papers 613R, Cowles Foundation for Research in Economics, Yale University.
  6. Refet S. Gürkaynak & Andrew T. Levin & Eric T. Swanson, 2006. "Does inflation targeting anchor long-run inflation expectations? evidence from long-term bond yields in the U.S., U.K., and Sweden," Working Paper Series 2006-09, Federal Reserve Bank of San Francisco.
  7. Athanasios Orphanides, 2001. "Monetary Policy Rules Based on Real-Time Data," American Economic Review, American Economic Association, vol. 91(4), pages 964-985, September.
  8. In-Koo Cho & Akihiko Matsui, 2005. "Time Consistency In Alternating-Move Policy Games," The Japanese Economic Review, Japanese Economic Association, vol. 56(3), pages 273-294.
  9. Ricardo Reis, 2004. "Inattentive Consumers," Working Papers 135, Princeton University, Woodrow Wilson School of Public and International Affairs, Discussion Papers in Economics..
  10. Jan Libich & Petr Stehlík, 2012. "Monetary Policy Facing Fiscal Indiscipline under Generalized Timing of Actions," Journal of Institutional and Theoretical Economics (JITE), Mohr Siebeck, Tübingen, vol. 168(3), pages 393-431, September.
  11. Beechey, Meredith J & Johannsen, Benjamin K & Levin, Andrew, 2007. "Are Long-Run Inflation Expectations Anchored More Firmly in the Euro Area than in the United States?," CEPR Discussion Papers 6536, C.E.P.R. Discussion Papers.
  12. Jan Libich, 2006. "An Explicit Inflation Target As A Commitment Device," CAMA Working Papers 2006-22, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  13. Takahashi, Satoru & Wen, Quan, 2003. "On asynchronously repeated games," Economics Letters, Elsevier, vol. 79(2), pages 239-245, May.
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