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Monetary policy & anchored expectations—An endogenous gain learning model

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  • Gáti, Laura

Abstract

Monetary policy is analyzed in a model with a potential unanchoring of inflation expectations. The degree of unanchoring is given by how sensitively the public’s long-run inflation expectations respond to inflation surprises. I find that optimal policy moves the interest rate aggressively when expectations unanchor, allowing the central bank to accommodate inflation fluctuations when expectations are well-anchored. Furthermore, I estimate the model-implied unanchoring process. The data suggest that unanchoring is nonlinear and asymmetric: expectations respond more sensitively to large or downside surprises than to smaller or upside ones.

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  • Gáti, Laura, 2023. "Monetary policy & anchored expectations—An endogenous gain learning model," Journal of Monetary Economics, Elsevier, vol. 140(S), pages 37-47.
    • Handle: RePEc:eee:moneco:v:140:y:2023:i:s:p:s37-s47
    DOI: 10.1016/j.jmoneco.2023.06.009
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    More about this item

    Keywords

    Anchored expectations; Behavioral macro; Monetary policy;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E71 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on the Macro Economy
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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