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The Signaling Effect of Raising Inflation

Author

Listed:
  • Jean Barthélémy

    (ENSAE Paris - École Nationale de la Statistique et de l'Administration Économique)

  • Eric Mengus

    (GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - HEC Paris - Ecole des Hautes Etudes Commerciales - CNRS - Centre National de la Recherche Scientifique)

Abstract

This paper argues that central bankers should temporarily raise inflation when anticipating liquidity traps to signal their credibility to forward guidance policies. As stable inflation in normal times either stems from central banker's credibility, e.g. through reputation, or from his aversion to inflation, the private sector is unable to infer the central banker's type from observing stable inflation, jeopardizing the efficiency of forward guidance policy. We show that this signaling motive can justify temporary deviations of inflation from target well above 2% but also that the low inflation volatility during the Great Moderation was insufficient to ensure fully efficient forward guidance when needed.

Suggested Citation

  • Jean Barthélémy & Eric Mengus, 2016. "The Signaling Effect of Raising Inflation," Working Papers hal-01985390, HAL.
  • Handle: RePEc:hal:wpaper:hal-01985390
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    Cited by:

    1. Philippe Andrade & Gaetano Gaballo & Eric Mengus & Benoît Mojon, 2019. "Forward Guidance and Heterogeneous Beliefs," American Economic Journal: Macroeconomics, American Economic Association, vol. 11(3), pages 1-29, July.
    2. Taisuke Nakata & Takeki Sunakawa, 2019. "Credible Forward Guidance," Finance and Economics Discussion Series 2019-037, Board of Governors of the Federal Reserve System (U.S.).
    3. Jean Barthélemy & Eric Mengus, 2017. "Credibility and Monetary Policy," Working Papers hal-03457527, HAL.
    4. Batista, Quentin & Nakata, Taisuke & Sunakawa, Takeki, 2023. "Credible Forward Guidance," Journal of Economic Dynamics and Control, Elsevier, vol. 153(C).
    5. Tillmann Peter, 2021. "Robust Monetary Policy Under Uncertainty About the Lower Bound," The B.E. Journal of Macroeconomics, De Gruyter, vol. 21(1), pages 309-321, January.
    6. repec:hal:spmain:info:hdl:2441/1lu2rbsv0n8pkqid81q0tfof3f is not listed on IDEAS
    7. Peter Tillmann, 2019. "Robust Monetary Policy Under Uncertainty About the Lower Bound," MAGKS Papers on Economics 201914, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    8. Calvin He, 2021. "Monetary Policy, Equity Markets and the Information Effect," RBA Research Discussion Papers rdp2021-04, Reserve Bank of Australia.

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    More about this item

    Keywords

    Forward Guidance; Inflation; Signaling;
    All these keywords.

    JEL classification:

    • 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
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes

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