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Inflation-Targeting Monetary Regime in an Environment of Heterogeneous Expectations of Inflation

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  • Jaylson Jair da Silveira
  • Gilberto Tadeu Lima

Abstract

We study the dynamics of an inflation targeting regime in a macroeconomic context represented by a three-equation model (IS curve, Phillips curve and interest rate rule) and with heterogeneous strategies to form expectations of inflation. Economic agents choose between using the official inflation target as predictor of future inflation (credulous strategy) or paying a random cost (unknown a priori) to perfectly predict it (skeptical strategy). The distribution of these strategies in the population follows an evolutionary dynamics with and without endogenous mutation. We find that full credibility is not a necessary condition for reaching the inflation target, given that heterogeneity of inflation expectations, when there is mutation, is an evolutionary equilibrium but the inflation target is nonetheless reached.

Suggested Citation

  • Jaylson Jair da Silveira & Gilberto Tadeu Lima, 2012. "Inflation-Targeting Monetary Regime in an Environment of Heterogeneous Expectations of Inflation," Working Papers, Department of Economics 2012_11, University of São Paulo (FEA-USP).
    • Handle: RePEc:spa:wpaper:2012wpecon11
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    More about this item

    Keywords

    inflation target; inflation expectation; evolutionary dynamics;
    All these keywords.

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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