Public's Inflation Expectations and Monetary Policy
The paper develops a DSGE model where monetary policy propagates by affecting and coordinating price setters' expectations. Price setters face costs of price adjustment and do not observe the history of technology, monetary, and preference shocks. They form expectations about the evolution of their nominal marginal costs observing their idiosyncratic productivity, which is correlated with the aggregate productivity, last period's output and inflation, and the interest rate set by the central bank according to a Taylor rule. The model is estimated through likelihood methods on a U.S. data set including the Survey of Professional Forecasters as a measure of price setters' expectations. The transmission channel based on price-setters' expectations is found to account for the following three empirical facts that have been documented by the VAR literature: (i) the delayed and persistent effects of monetary shocks on inflation with associated sluggish response of real output; (ii) the price puzzle; (iii) the disappearance of the price puzzle after the 1970s. Structural policies of disinflation, such as the introduction of an "inflation targeting", need to be backed up by a perfect commitment device to succeed.
|Date of creation:||2011|
|Date of revision:|
|Contact details of provider:|| Postal: Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA|
Web page: http://www.EconomicDynamics.org/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Peter J. Klenow & Oleksiy Kryvtsov, 2008. "State-Dependent or Time-Dependent Pricing: Does it Matter for Recent U.S. Inflation?," The Quarterly Journal of Economics, Oxford University Press, vol. 123(3), pages 863-904.
- Mirko Wiederholt, 2010. "rational inattention," The New Palgrave Dictionary of Economics, Palgrave Macmillan.
- Mackowiak, Bartosz Adam & Moench, Emanuel & Wiederholt, Mirko, 2009.
"Sectoral Price Data and Models of Price Setting,"
CEPR Discussion Papers
7339, C.E.P.R. Discussion Papers.
- Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
- Klaus Adam, 2003.
"Optimal Monetary Policy with Imperfect Common Knowledge,"
Computing in Economics and Finance 2003
263, Society for Computational Economics.
- Adam, Klaus, 2007. "Optimal monetary policy with imperfect common knowledge," Journal of Monetary Economics, Elsevier, vol. 54(2), pages 267-301, March.
- Adam, Klaus, 2003. "Optimal monetary policy with imperfect common knowledge," Working Paper Series 0223, European Central Bank.
- Adam, Klaus, 2003. "Optimal Monetary Policy with Imperfect Common Knowledge," CFS Working Paper Series 2003/12, Center for Financial Studies (CFS).
- Klaus Adam, 2004. "Optimal Monetary Policy with Imperfect Common Knowledge," DNB Staff Reports (discontinued) 116, Netherlands Central Bank.
- Klaus Adam, 2004. "Optimal Monetary Policy with Imperfect Common Knowledge," Econometric Society 2004 North American Winter Meetings 24, Econometric Society.
- Adam, Klaus, 2004. "Optimal Monetary Policy with Imperfect Common Knowledge," CEPR Discussion Papers 4594, C.E.P.R. Discussion Papers.
- Castelnuovo, Efrem & Surico, Paolo, 2009.
"Monetary policy, inflation expectations and the price puzzle,"
Research Discussion Papers
30/2009, Bank of Finland.
- Efrem Castelnuovo & Paolo Surico, 2010. "Monetary Policy, Inflation Expectations and The Price Puzzle," Economic Journal, Royal Economic Society, vol. 120(549), pages 1262-1283, December.
- Efrem Castelnuovo & Paolo Surico, 2009. "Monetary Policy, Inflation Expectations and the Price Puzzle," "Marco Fanno" Working Papers 0101, Dipartimento di Scienze Economiche "Marco Fanno".
- Klenow, Peter J. & Malin, Benjamin A., 2010.
"Microeconomic Evidence on Price-Setting,"
Handbook of Monetary Economics,
in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 6, pages 231-284
- Yuriy Gorodnichenko, 2008. "Endogenous information, menu costs and inflation persistence," NBER Working Papers 14184, National Bureau of Economic Research, Inc.
- Luigi Paciello, 2012.
"Monetary Policy and Price Responsiveness to Aggregate Shocks under Rational Inattention,"
Journal of Money, Credit and Banking,
Blackwell Publishing, vol. 44(7), pages 1375-1399, October.
- Luigi Paciello, 2009. "Monetary Policy and Price Responsiveness to Aggregate Shocks under Rational Inattention," EIEF Working Papers Series 0916, Einaudi Institute for Economics and Finance (EIEF), revised Sep 2011.
- Kristoffer Nimark, 2007.
"Dynamic Pricing and Imperfect Common Knowledge,"
RBA Research Discussion Papers
rdp2007-12, Reserve Bank of Australia.
- George-Marios Angeletos & Jennifer La'O, 2009. "Incomplete Information, Higher-Order Beliefs and Price Inertia," NBER Working Papers 15003, National Bureau of Economic Research, Inc.
- Kenneth L. Judd, 1998. "Numerical Methods in Economics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262100711, June.
- Kydland, Finn E & Prescott, Edward C, 1982.
"Time to Build and Aggregate Fluctuations,"
Econometric Society, vol. 50(6), pages 1345-70, November.
- Finn E. Kydland & Edward C. Prescott, 1982. "Web interface for "Time to Build and Aggregate Fluctuations"," QM&RBC Codes 4a, Quantitative Macroeconomics & Real Business Cycles.
- Finn E. Kydland & Edward C. Prescott, 1982. "Executable program for "Time to Build and Aggregate Fluctuations"," QM&RBC Codes 4, Quantitative Macroeconomics & Real Business Cycles.
- Morten O. Ravn & Stephanie Schmitt-Grohe, 2004.
2004 Meeting Papers
208, Society for Economic Dynamics.
- James H. Stock & Mark W. Watson, 2001. "Vector Autoregressions," Journal of Economic Perspectives, American Economic Association, vol. 15(4), pages 101-115, Fall.
- Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
When requesting a correction, please mention this item's handle: RePEc:red:sed011:1151. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann)
If references are entirely missing, you can add them using this form.