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Inflation Targets, Credibility and Persistence In a Simple Sticky-Price Framework

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  • Rudd, Jeremy

    (Federal Reserve Board)

  • Whelan, Karl

    (Central Bank and Financial Services Authority of Ireland)

Abstract

An important trend in macroeconomic research in recent years involves the increased use of optimization-based models with nominal rigidities (such as sticky prices) to analyse how monetary policy affects the economy and how optimal policy should be designed. This paper presents a re-formulated version of a commonly-used baseline sticky-price model that has been extended to account for variations over time in the central bank's inflation target. We derive a closed-form solution for the model and analyse its properties under various parameter values. The model is used to explore topics relating to the effects of disinflationary monetary policies and inflation persistence. In particular, we employ the model to illustrate and assess the critique that standard sticky-price models generate counterfactual predictions for the effects of monetary policy.

Suggested Citation

  • Rudd, Jeremy & Whelan, Karl, 2003. "Inflation Targets, Credibility and Persistence In a Simple Sticky-Price Framework," Research Technical Papers 6/RT/03, Central Bank of Ireland.
  • Handle: RePEc:cbi:wpaper:6/rt/03
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    References listed on IDEAS

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    1. Devereux, Michael B & Yetman, James, 2003. " Predetermined Prices and the Persistent Effects of Money on Output," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(5), pages 729-741, October.
    2. Erceg, Christopher J. & Levin, Andrew T., 2003. "Imperfect credibility and inflation persistence," Journal of Monetary Economics, Elsevier, vol. 50(4), pages 915-944, May.
    3. Whelan, Karl, 2002. "A Guide to U.S. Chain Aggregated NIPA Data," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 48(2), pages 217-233, June.
    4. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
    5. Mankiw, N Gregory, 2001. "The Inexorable and Mysterious Tradeoff between Inflation and Unemployment," Economic Journal, Royal Economic Society, vol. 111(471), pages 45-61, May.
    6. Pivetta, Frederic & Reis, Ricardo, 2007. "The persistence of inflation in the United States," Journal of Economic Dynamics and Control, Elsevier, vol. 31(4), pages 1326-1358, April.
    7. Ben S. Bernanke & Mark Gertler, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 27-48, Fall.
    8. Bennett T. McCallum, 2001. "Should Monetary Policy Respond Strongly to Output Gaps?," American Economic Review, American Economic Association, vol. 91(2), pages 258-262, May.
    9. Ball, Laurence, 1995. "Disinflation with imperfect credibility," Journal of Monetary Economics, Elsevier, vol. 35(1), pages 5-23, February.
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