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Inflation shocks and the New Keynesian model: When should central banks fear inflation expectations?

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  • Gobbi, Lucio
  • Mazzocchi, Ronny
  • Tamborini, Roberto

Abstract

When inflation picks up, central banks fear that de-anchored expectations trigger ever increasing inflation, but this scenario does not materialize in the standard New Keynesian (NK) blueprint for central banks. Divergent inflation processes may result introducing boundedly rational beliefs about future inflation that de-anchor endogenously, together with indexed wages and persistent shocks. However, by means of simulations of the model, we find that the relevant parameters should be far beyond their consensus empirical values. Either the concern with the de-anchoring of inflation expectations is overrated or it should be given different theoretical underpinnings than the NK ones.

Suggested Citation

  • Gobbi, Lucio & Mazzocchi, Ronny & Tamborini, Roberto, 2025. "Inflation shocks and the New Keynesian model: When should central banks fear inflation expectations?," The North American Journal of Economics and Finance, Elsevier, vol. 80(C).
    • Handle: RePEc:eee:ecofin:v:80:y:2025:i:c:s1062940825001482
    DOI: 10.1016/j.najef.2025.102508
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    JEL classification:

    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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