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Transparency, Expectations Anchoring and the Inflation Target

  • Guido Ascari

    ()

    (Department of Economics and Management, University of Pavia)

  • Anna Florio

    ()

    (Polytechnic of Milan)

This paper proves that a higher inflation target unanchors expectations, as feared by Fed Chairman Bernanke. It does so both asymptotically, because it shrinks the E-stability region when a central bank follows a Taylor rule, and in the transition phase, because it slows down the speed of convergence of expectations. Moreover, the higher the inflation target, the more the policy should respond to inflation and the less to output to guarantee E-stability. Hence, a policy that increases the inflation target and increase the monetary policy response to output would be "reckless". Moreover, we show that transparency is an essential component of the inflation targeting framework and it helps anchoring expectations. However, the importance of being transparent diminishes with the level of the inflation target.

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File URL: http://economia.unipv.it/docs/dipeco/quad/ps/RePEc/pav/demwpp/DEMWP0022.pdf
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Paper provided by University of Pavia, Department of Economics and Management in its series DEM Working Papers Series with number 022.

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Length: 48 pages
Date of creation: Nov 2012
Date of revision:
Handle: RePEc:pav:demwpp:022
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  1. James Bullard & Kaushik Mitra, . "Determinacy, Learnability, and Monetary Policy Inertia," Discussion Papers 00/43, Department of Economics, University of York.
  2. Eusepi, Stefano & Preston, Bruce, 2007. "Central bank communication and expectations stabilization," Proceedings, Federal Reserve Bank of San Francisco, issue March, pages 1-43.
  3. Bennett T. McCallum, 2006. "E-Stability vis-a-vis Determinacy Results for a Broad Class of Linear Rational Expectations Models," NBER Working Papers 12441, National Bureau of Economic Research, Inc.
  4. Teruyoshi Kobayashi & Ichiro Muto, 2011. "A note on expectational stability under non-zero trend inflation," Discussion Papers 1102, Graduate School of Economics, Kobe University.
  5. Guido Ascari, 2004. "Staggered prices and trend inflation: some nuisances," Macroeconomics 0404029, EconWPA.
  6. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 2001. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," NBER Working Papers 8403, National Bureau of Economic Research, Inc.
  7. Christian Matthes & Argia M. Sbordone & Timothy Cogley, 2011. "Optimal Disinflation Under Learning," 2011 Meeting Papers 74, Society for Economic Dynamics.
  8. Levin, Andrew & Yun, Tack, 2007. "Reconsidering the natural rate hypothesis in a New Keynesian framework," Journal of Monetary Economics, Elsevier, vol. 54(5), pages 1344-1365, July.
  9. Giovanni Dell'Ariccia & Olivier J. Blanchard & Paolo Mauro, 2010. "Rethinking Macroeconomic Policy," IMF Staff Position Notes 2010/03, International Monetary Fund.
  10. James Bullard & Kaushik Mitra, 2002. "Learning about monetary policy rules," Working Papers 2000-001, Federal Reserve Bank of St. Louis.
  11. Bruce Preston, 2005. "Learning about Monetary Policy Rules when Long-Horizon Expectations Matter," International Journal of Central Banking, International Journal of Central Banking, vol. 1(2), September.
  12. Frank Smets & Raf Wouters, 2003. "An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area," Journal of the European Economic Association, MIT Press, vol. 1(5), pages 1123-1175, 09.
  13. Berardi, Michele & Duffy, John, 2007. "The value of central bank transparency when agents are learning," European Journal of Political Economy, Elsevier, vol. 23(1), pages 9-29, March.
  14. Olivier Coibion & Yuriy Gorodnichenko & Johannes Wieland, 2010. "The Optimal Inflation Rate in New Keynesian Models," Working Papers 91, Department of Economics, College of William and Mary.
  15. Preston, Bruce, 2006. "Adaptive learning, forecast-based instrument rules and monetary policy," Journal of Monetary Economics, Elsevier, vol. 53(3), pages 507-535, April.
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