IDEAS home Printed from https://ideas.repec.org/a/fau/fauart/v55y2005i7-8p380-394.html
   My bibliography  Save this article

Inflation Expectations and Monetary Policy

Author

Listed:
  • Jan Filáèek

    () (Czech National Bank)

Abstract

This paper shows that an economy’s behavior differs significantly according to assumptions made on the formation of inflation expectations. We analyzed the behavior of an open economy in a regime of explicit inflation targeting with commitment. The economy is exposed to three different shocks – demand, supply, and exchange rate – and its reaction is analyzed under three different assumptions on inflation-expectations formation: naive, rational, and adaptive learning. The economy in which rational expectations were assumed showed the least volatile development and minimized the central bank’s loss function. The stabilizing effect of this forward-looking type of expectation was most evident in the case of supply shock. When naive expectations were assumed, the economy reacted to all shocks with significantly bigger and longer-lasting fluctuations. The worst results were obtained assuming adaptive-learning expectations, where shocks lead to large oscillations and the economy stabilized only several years after the shock.

Suggested Citation

  • Jan Filáèek, 2005. "Inflation Expectations and Monetary Policy," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 55(7-8), pages 380-394, July.
  • Handle: RePEc:fau:fauart:v:55:y:2005:i:7-8:p:380-394
    as

    Download full text from publisher

    File URL: http://journal.fsv.cuni.cz/storage/1028_s_380_394.pdf
    Download Restriction: no

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. John C. Williams, 2010. "Monetary policy in a low inflation economy with learning," Economic Review, Federal Reserve Bank of San Francisco, pages 1-12.

    More about this item

    Keywords

    inflation expectation; model simulation; monetary policy;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fau:fauart:v:55:y:2005:i:7-8:p:380-394. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Lenka Herrmannova). General contact details of provider: http://edirc.repec.org/data/icunicz.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.