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The Power of Open-Mouth Policies

Author

Listed:
  • Lepetyuk, Vadym
  • Maliar, Serguei
  • Taylor, John

Abstract

Central bank's announcements about future monetary policy make economic agents to react before the announced policy takes place. We evaluate the anticipation effects of such announcements in the context of a realistic dynamic economic model of central banking. In our experiments, we consider temporary and permanent anticipated changes in policy rules including changes in inflation target, natural rate of interest and Taylor-rule coefficients, as well as anticipated switches from inflation targeting to price-level targeting and average inflation targeting. We show that the studied nonrecurrent news shocks about future policies have sizable anticipation effects on the economy. Our methodological contribution is to develop a novel perturbation-based framework for constructing nonstationary solutions to economic models with nonrecurrent news shocks.

Suggested Citation

  • Lepetyuk, Vadym & Maliar, Serguei & Taylor, John, 2021. "The Power of Open-Mouth Policies," CEPR Discussion Papers 16262, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:16262
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    More about this item

    Keywords

    News shocks; Turnpike theorem; Time-dependent models; Nonstationary models; Unbalanced growth; Time-varying parameters; Regime switches; Monetary policies; Price-level targeting; Average inflation targeting;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • 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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