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How Transparent About Its Inflation Target Should a Central Bank be? An Agent-Based Model Assessment

  • Isabelle SALLE
  • Marc-Alexandre SENEGAS

This paper revisits the benefits of explicitly announcing an inflation target for the con- duct of monetary policy in the framework of an agent-based model (ABM). This framework offers a flexible tool for modeling heterogeneity among individual agents and their bounded rationality, and to emphasize, on this basis, the role of learning in macroeconomic dynamics. We consider that those three features (heterogeneity, bounded rationality, and learning) are particularly relevant if one desires to question the rationale for the monetary authorities to be transparent about the inflation target, and to achieve credibility. Indeed, the inflation targeting’s potential role in anchoring inflation expectations and stabilizing the inflation and the economy can be analyzed more realistically if we do not assume a representative agent framework based on substantial rationality in behaviors and expectations. Our results show that a dynamic loop between credibility and success can arise, and stabilize inflation, but only in the case of a learning environment that corresponds to a moderate degree in heterogeneity regarding the behavior and decisions of individual agents. In a more general way, we analyze, using this ABM, different assumptions about the nature of the economic volatility, and the degree of disclosure of the target.

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Paper provided by Groupe de Recherche en Economie Théorique et Appliquée in its series Cahiers du GREThA with number 2013-24.

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Date of creation: 2013
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Handle: RePEc:grt:wpegrt:2013-24
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