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Conquering Credibility For Monetary Policy Under Sticky Confidence

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  • JAYLSON JAIR DA SILVEIRA
  • GILBERTO TADEU LIMA

Abstract

We derive a best-reply monetary policy when the confidence by price setters on the monetary authority’s commitment to price level targeting may be both incomplete and sticky. We find that complete confidence (or full credibility) is not a necessary condition for the achievement of a price level target even when heterogeneity in firms’ price level expectations is endogenously time-varying and may emerge as a long-run equilibrium outcome. In fact, in the absence of exogenous perturbations to the dynamic of confidence building, it is the achievement of a price level target for long enough that, due to stickiness in the state of confidence, rather ensures the conquering of full credibility. This result has relevant implications for the conduct of monetary policy in pursuit of price stability. One implication is that setting a price level target matters more as a means to provide monetary policy with a sharper focus on price stability than as a device to conquer credibility. As regards the conquering of credibility for monetary policy, it turns out that actions speak louder than words, as the continuing achievement of price stability is what ultimately performs better as a confidence-building device.
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Suggested Citation

  • Jaylson Jair Da Silveira & Gilberto Tadeu Lima, 2016. "Conquering Credibility For Monetary Policy Under Sticky Confidence," Anais do XLII Encontro Nacional de Economia [Proceedings of the 42nd Brazilian Economics Meeting] 023, ANPEC - Associação Nacional dos Centros de Pós-Graduação em Economia [Brazilian Association of Graduate Programs in Economics].
    • Handle: RePEc:anp:en2014:023
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    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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