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A note on expectational stability under non-zero trend inflation

Listed author(s):
  • Kobayashi, Teruyoshi
  • Muto, Ichiro

This study examines the expectational stability of the rational expectations equilibria (REE) under alternative Taylor rules when trend inflation is non-zero. We find that when trend inflation is high, the REE is likely to be expectationally unstable. This result holds true regardless of the nature of the data (such as contemporaneous data, forecast, and lagged data) introduced in the Taylor rule. Our results suggest that a high macroeconomic volatility during the period of high trend inflation can be well explained by introducing the concept of expectational stability.

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File URL: https://mpra.ub.uni-muenchen.de/22952/1/MPRA_paper_22952.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 22952.

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Date of creation: 28 May 2010
Handle: RePEc:pra:mprapa:22952
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  1. Bruce Preston, 2003. "Learning about monetary policy rules when long-horizon expectations matter," FRB Atlanta Working Paper 2003-18, Federal Reserve Bank of Atlanta.
  2. Honkapohja, Seppo & Mitra, Kaushik, 2002. "Performance of monetary policy with internal central bank forecasting," Working Paper Series 0127, European Central Bank.
  3. Seppo Honkapohja, 2003. "Discussion of Preston, "Learning about monetary policy rules when long-horizon expectations matter"," FRB Atlanta Working Paper 2003-19, Federal Reserve Bank of Atlanta.
  4. Timothy Cogley & Argia M. Sbordone, 2008. "Trend Inflation, Indexation, and Inflation Persistence in the New Keynesian Phillips Curve," American Economic Review, American Economic Association, vol. 98(5), pages 2101-2126, December.
  5. Kurozumi, Takushi, 2014. "Trend inflation, sticky prices, and expectational stability," Journal of Economic Dynamics and Control, Elsevier, vol. 42(C), pages 175-187.
  6. Olivier Coibion & Yuriy Gorodnichenko, 2008. "Monetary Policy, Trend Inflation and the Great Moderation: An Alternative Interpretation," NBER Working Papers 14621, National Bureau of Economic Research, Inc.
  7. Bennett T. McCallum, 1997. "Issues in the Design of Monetary Policy Rules," NBER Working Papers 6016, National Bureau of Economic Research, Inc.
  8. Seppo Honkapohja & Kaushik Mitra & George W. Evans, 2011. "Notes on Agents¡¯ Behavioral Rules Under Adaptive Learning and Studies of Monetary Policy," CDMA Working Paper Series 201102, Centre for Dynamic Macroeconomic Analysis.
  9. Argia M. Sbordone, 2007. "Inflation persistence: alternative interpretations and policy implications," Staff Reports 286, Federal Reserve Bank of New York.
  10. Preston, Bruce, 2006. "Adaptive learning, forecast-based instrument rules and monetary policy," Journal of Monetary Economics, Elsevier, vol. 53(3), pages 507-535, April.
  11. Guido Ascari, 2004. "Staggered Prices and Trend Inflation: Some Nuisances," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(3), pages 642-667, July.
  12. Kaushik Mitra & James Bullard, "undated". "Learning About Monetary Policy Rules," Discussion Papers 00/41, Department of Economics, University of York.
  13. Ascari, Guido & Ropele, Tiziano, 2007. "Trend Inflation, Taylor Principle and Indeterminacy," Kiel Working Papers 1332, Kiel Institute for the World Economy (IfW).
  14. Olivier Blanchard & Giovanni Dell'Ariccia & Paolo Mauro, 2010. "Rethinking Macroeconomic Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(s1), pages 199-215, 09.
  15. Michael T. Kiley, 2004. "Is moderate-to-high inflation inherently unstable?," Finance and Economics Discussion Series 2004-43, Board of Governors of the Federal Reserve System (U.S.).
  16. West, Kenneth D., 2007. "Comment on Argia M. Sbordone "Inflation persistence: Alternative interpretations and policy implications"," Journal of Monetary Economics, Elsevier, vol. 54(5), pages 1340-1343, July.
  17. Ascari, Guido & Ropele, Tiziano, 2007. "Optimal monetary policy under low trend inflation," Journal of Monetary Economics, Elsevier, vol. 54(8), pages 2568-2583, November.
  18. Muto, Ichiro, 2011. "Monetary policy and learning from the central bank's forecast," Journal of Economic Dynamics and Control, Elsevier, vol. 35(1), pages 52-66, January.
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