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Macroeconomic effects of inflation target uncertainty shocks

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  • Arbex, Marcelo
  • Caetano, Sidney
  • Correa, Wilson

Abstract

We study the macroeconomic effects of a time-varying inflation target (IT), which stochastic volatility follows an autoregressive process. We show that the quantitative economic effects of IT uncertainty shocks depend crucially on the Taylor-rule type adopted by the monetary authority. Following this kind of disturbance, a less severe recession and deflation is observed under a more reactive interest rate rule, while an empirical plausible degree of interest rate smoothing leads output, unemployment, and inflation to react more strongly causing the recession to be more severe and deflationary.

Suggested Citation

  • Arbex, Marcelo & Caetano, Sidney & Correa, Wilson, 2019. "Macroeconomic effects of inflation target uncertainty shocks," Economics Letters, Elsevier, vol. 181(C), pages 111-115.
    • Handle: RePEc:eee:ecolet:v:181:y:2019:i:c:p:111-115
    DOI: 10.1016/j.econlet.2019.05.009
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    Keywords

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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • 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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