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Inflation Target Transparency and the Macroeconomy

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Listed author(s):
  • Melecky, Martin
  • Rodrıguez Palenzuela, Diego
  • Soderstrom, Ulf

Abstract

We quantify the effects of monetary policy transparency and credibility on macroeconomic volatility in an estimated model of the euro area economy. In our model, private agents are unable to distinguish between temporary shocks to the central bank’s monetary policy rule and persistent shifts in the inflation target, and therefore use optimal filtering techniques to construct estimates of the future monetary policy stance. We find that the macroeconomic benefits of credibly announcing the current level of the time-varying inflation target are reasonably small as long as private agents correctly understand the stochastic processes governing the inflation target and the temporary policy shock. If, on the other hand, private agents overestimate the volatility of the inflation target, the overall gains of announcing the target can be substantial. We also show that the central bank to some extent can help private agents in their learning process by responding more aggressively to deviations of inflation from the target.

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File URL: https://mpra.ub.uni-muenchen.de/10545/1/MPRA_paper_10545.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 10545.

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Date of creation: 2008
Handle: RePEc:pra:mprapa:10545
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Keywords: Credibility; Transparency; Inflation targeting; Imperfect information; Private sector learning;

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Find related papers by JEL classification:
  • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
  • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
  • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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Cited by:

  1. Michael U. Krause & Stéphane Moyen, 2016. "Public Debt and Changing Inflation Targets," American Economic Journal: Macroeconomics, American Economic Association, vol. 8(4), pages 142-176, October.
  2. Patrick Fève & Julien Matheron & Jean-Guillaume Sahuc, 2010. "Inflation Target Shocks and Monetary Policy Inertia in the Euro Area," Economic Journal, Royal Economic Society, vol. 120(547), pages 1100-1124, 09.
  3. Aleš Melecký & Martin Melecký, 2012. "Vliv makroekonomických šoků na dynamiku vládního dluhu: jak robustní je fiskální pozice České republiky?
    [The Impact of Macroeconomic Shocks on the Government Debt Dynamics: How Robust is the Fisca    ," Politická ekonomie, University of Economics, Prague, vol. 2012(6), pages 723-742.
  4. Paul Levine & Joseph Pearlman & Bo Yang, 2012. "Imperfect Information, Optimal Monetary Policy and Informational Consistency," School of Economics Discussion Papers 1012, School of Economics, University of Surrey.
  5. Del Negro, Marco & Eusepi, Stefano, 2011. "Fitting observed inflation expectations," Journal of Economic Dynamics and Control, Elsevier, vol. 35(12), pages 2105-2131.
  6. Valdivia, Daney & Loayza, Lilian, 2010. "Adopción de metas de inflación y su impacto en las expectativas de inflación y volatilidad del crecimiento económico: evidencia empírica para Bolivia
    [Inflation targeting and its impact on the infl    ," MPRA Paper 37328, University Library of Munich, Germany, revised 25 Aug 2011.
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