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Transparency, Expectations Anchoring and the Inflation Target

Author

Listed:
  • Guido Ascari

    () (Department of Economics and Management, University of Pavia)

  • Anna Florio

    () (Polytechnic of Milan)

Abstract

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.

Suggested Citation

  • Guido Ascari & Anna Florio, 2012. "Transparency, Expectations Anchoring and the Inflation Target," DEM Working Papers Series 022, University of Pavia, Department of Economics and Management.
  • Handle: RePEc:pav:demwpp:022
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    References listed on IDEAS

    as
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    Cited by:

    1. Hartmann, Philipp & Smets, Frank, 2018. "The first twenty years of the European Central Bank: monetary policy," Working Paper Series 2219, European Central Bank.
    2. Okimoto, Tatsuyoshi, 2019. "Trend inflation and monetary policy regimes in Japan," Journal of International Money and Finance, Elsevier, vol. 92(C), pages 137-152.
    3. Guido Ascari & Argia M. Sbordone, 2014. "The Macroeconomics of Trend Inflation," Journal of Economic Literature, American Economic Association, vol. 52(3), pages 679-739, September.

    More about this item

    Keywords

    Trend Inflation; Learning; Monetary Policy; Trasparency;

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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