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Monetary policy and inflationary shocks under imperfect credibility

  • Darracq Pariès, Matthieu
  • Moyen, Stéphane

This paper quantifies the deterioration of achievable tabilization outcomes when monetary policy operates under imperfect credibility and weak anchoring of long-term expectations. Within a medium-scale DSGE model, we introduce through a simple signal extraction problem, an imperfect knowledge configuration where rice and wage setters wrongly doubt about the determination of the central bank to leave unchanged its long-term inflation objective in the face of inflationary shocks. The magnitude of private sector learning has been calibrated to match the volatility of US inflation expectations at long horizons. Given such illustrative calibrations, we find that the costs of aintaining a given inflation volatility under weak credibility could amount to 0.25 pp of output gap standard deviation. JEL Classification: E4, E5, F4

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File URL: http://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp1065.pdf
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Paper provided by European Central Bank in its series Working Paper Series with number 1065.

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Date of creation: Jun 2009
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Handle: RePEc:ecb:ecbwps:20091065
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  1. Smets, Frank & Wouters, Rafael, 2007. "Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach," CEPR Discussion Papers 6112, C.E.P.R. Discussion Papers.
  2. Christopher J. Erceg and Andrew T. Levin, 2001. "Imperfect Credibility and Inflation Persistence," Computing in Economics and Finance 2001 19, Society for Computational Economics.
  3. Meredith J. Beechey & Benjamin K. Johannsen & Andrew T. Levin, 2008. "Are long-run inflation expectations anchored more firmly in the Euro area than in the United States?," Finance and Economics Discussion Series 2008-23, Board of Governors of the Federal Reserve System (U.S.).
  4. Luca Benati, 2008. "Investigating Inflation Persistence Across Monetary Regimes," The Quarterly Journal of Economics, MIT Press, vol. 123(3), pages 1005-1060, August.
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