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The Flattening of the Phillips Curve and the Learning Problem of the Central Bank

Author

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  • Jean-Paul L'Huillier

    (EIEF)

  • William R. Zame

    (University of California, Los Angeles)

Abstract

We illustrate an intuitive channel through which price stickiness limits the ability of a central bank to improve welfare through stabilization policy. If the central bank uses infl ation to obtain information about nominal spending, sticky prices impair the learning ability of the central bank and hence its ability to implement the right stabilization policy. Infl ation targeting makes prices stickier, and worsens this learning problem. The key is a microfounded information-based model for price stickiness: taking into account how agents react to the adoption of infl ation targeting makes explicit a basic confl ict between in flation targeting and stabilization policy.

Suggested Citation

  • Jean-Paul L'Huillier & William R. Zame, 2015. "The Flattening of the Phillips Curve and the Learning Problem of the Central Bank," EIEF Working Papers Series 1503, Einaudi Institute for Economics and Finance (EIEF), revised Oct 2014.
  • Handle: RePEc:eie:wpaper:1503
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    References listed on IDEAS

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    Cited by:

    1. Tatsushi Okuday & Tomohiro Tsurugaz & Francesco Zanetti, 2019. "Imperfect Information, Shock Heterogeneity, and Inflation Dynamics," BCAM Working Papers 1906, Birkbeck Centre for Applied Macroeconomics.

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