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Discretionary Monetary Policy and Inflation Persistence

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Abstract

Rational expectations models of staggered price/wage contracts have failed to replicate the observed persistence in inflation and unemployment during disinflation periods. The current literature on this persistency puzzle has focused on augmenting the nominal contract model with imperfect credibility and learning. In this paper, I re-examine the persistency puzzle by focusing on the discretionary nature of monetary policy. I show that when the central bank is allowed to re-optimize a quadratic loss function each period, imperfect credibility and learning, even in the absence of staggered contracts, can generate a significant amount of inflation persistence and employment losses during a disinflationary period.

Suggested Citation

  • Niklas J. Westelius, 2005. "Discretionary Monetary Policy and Inflation Persistence," Economics Working Paper Archive at Hunter College 424, Hunter College Department of Economics.
    • Handle: RePEc:htr:hcecon:424
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    Cited by:

    1. Marco Bonomo & Carlos Carvalho, 2010. "Imperfectly Credible Disinflation under Endogenous Time‐Dependent Pricing," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(5), pages 799-831, August.
    2. Westelius, Niklas J., 2009. "Imperfect transparency and shifts in the central bank's output gap target," Journal of Economic Dynamics and Control, Elsevier, vol. 33(4), pages 985-996, April.
    3. Christoph S. Weber, 2018. "Central bank transparency and inflation (volatility) – new evidence," International Economics and Economic Policy, Springer, vol. 15(1), pages 21-67, January.
    4. Qin, Li & Sidiropoulos, Moïse & Spyromitros, Eleftherios, 2013. "Robust monetary policy under model uncertainty and inflation persistence," Economic Modelling, Elsevier, vol. 30(C), pages 721-728.
    5. Marika Karanassou & Dennis J. Snower, 2007. "Inflation Persistence and the Phillips Curve Revisited," Working Papers 586, Queen Mary University of London, School of Economics and Finance.
    6. Bonomo, Marco Antônio Cesar & Carvalho, Carlos Viana de, 2003. "Endogenous time-dependent rules and the costs of disinflation with imperfect credibility," FGV EPGE Economics Working Papers (Ensaios Economicos da EPGE) 505, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil).
    7. Christoph S. Weber, 2020. "The unemployment effect of central bank transparency," Empirical Economics, Springer, vol. 59(6), pages 2947-2975, December.
    8. Muhammad Omer & Jakob De Haan & Bert Scholtens, 2015. "An empirical analysis of excess interbank liquidity: a case study of Pakistan," Applied Economics, Taylor & Francis Journals, vol. 47(44), pages 4754-4776, March.
    9. Pankaj Kumar, 2015. "Can Univariate Time Series Models of Inflation Help Discriminate Between Alternative Sources of Inflation PersistenceAuthor-Name: Naveen Srinivasan," Working Papers 2015-104, Madras School of Economics,Chennai,India.
    10. van der Cruijsen, C.A.B., 2008. "The economic impact of central bank transparency," Other publications TiSEM 86c1ba91-1952-45b4-adac-8, Tilburg University, School of Economics and Management.
    11. Naveen Srinivasan & Pankaj Kumar, 2012. "Inflation Persistence: Does Credibility of the Monetary Regime Matter?," Economics Bulletin, AccessEcon, vol. 32(4), pages 2944-2954.
    12. Geronikolaou, George & Spyromitros, Eleftherios & Tsintzos, Panagiotis, 2020. "Progressive taxation and human capital as determinants of inflation persistence," Economic Modelling, Elsevier, vol. 88(C), pages 82-97.
    13. Marcus Giamattei, 2022. "Can Cold Turkey Reduce Inflation Inertia? Evidence on Disinflation and Level‐k Thinking from a Laboratory Experiment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 54(8), pages 2477-2517, December.
    14. Akhand Akhtar Hossain, 2015. "The Evolution of Central Banking and Monetary Policy in the Asia-Pacific," Books, Edward Elgar Publishing, number 14611.
    15. Dai, Meixing & Sidiropoulos, Moïse & Spyromitros, Eleftherios, 2008. "Monetary policy transparency and inflation persistence in a small open economy," MPRA Paper 13829, University Library of Munich, Germany, revised Mar 2009.
    16. Zheng‐Hao Lai & Jyh‐Lin Wu, 2023. "Monetary policy transparency and real exchange rate adjustment," Review of International Economics, Wiley Blackwell, vol. 31(3), pages 1173-1198, August.
    17. Karanassou, Marika & Snower, Dennis J., 2007. "Inflation Persistence and the Phillips Curve Revisited," IZA Discussion Papers 2600, Institute of Labor Economics (IZA).
    18. Karanassou, Marika & Snower, Dennis J., 2007. "Inflation persistence and the Philips curve revisited," Kiel Working Papers 1349, Kiel Institute for the World Economy (IfW Kiel).
    19. Geronikolaou, George & Spyromitros, Eleftherios & Tsintzos, Panagiotis, 2016. "Inflation persistence: The path of labor market structural reforms," Economic Modelling, Elsevier, vol. 58(C), pages 317-322.
    20. Stephanos Papadamou & Eleftherios Spyromitros & Panagiotis Tsintzos, 2017. "Public investment, inflation persistence and central bank independence," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 44(6), pages 976-986, November.
    21. Akhand Hossain, 2014. "Monetary policy, inflation, and inflation volatility in Australia," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 36(4), pages 745-780.
    22. Agnieszka Leszczynska & Katarzyna Hertel, 2013. "Inflation persistence – a disaggregated approach," EcoMod2013 5692, EcoMod.
    23. Ngomba Bodi, Francis Ghislain & Tadadjeu Wemba, Dessy-Karl & Soulemanou, Soulemanou, 2020. "Transparence des Banques Centrales et efficacité de la politique monétaire : quelles implications pour la Banque des Etats de l’Afrique Centrale ? [Central Bank's Transparency and effectiveness of ," MPRA Paper 116436, University Library of Munich, Germany.
    24. Paresh Kumar Narayan, 2019. "Understanding Indonesia’S City-Level Consumer Price Formation: Implications For Price Stability," Bulletin of Monetary Economics and Banking, Bank Indonesia, vol. 22(4), pages 405-422, December.

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    More about this item

    Keywords

    Monetary policy; Disinflation; Credibility; Inflation persistence;
    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

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