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Learning the inflation target

  • Ricardo Nunes

    (Universitat Pompeu Fabra)

The New Keynesian model with rational expectations unrealistically predicts that unanticipated credible changes in the inflation target lead to an immediate jump in the inflation level while the output gap is unaffected. We set up a theoretical model where agents learn the behaviour of the economy. In this context, a permanent change in the inflation target leads inflation to respond sluggishly while the output gap is temporarily affected. We extend the model to allow for both learners and forward looking agents to coexist. The calibrated model explains quite well transition dynamics during the Volker disinflation.

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File URL: http://econwpa.repec.org/eps/mac/papers/0504/0504033.pdf
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Paper provided by EconWPA in its series Macroeconomics with number 0504033.

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Length: 36 pages
Date of creation: 25 Apr 2005
Date of revision: 26 Apr 2005
Handle: RePEc:wpa:wuwpma:0504033
Note: Type of Document - pdf; pages: 36
Contact details of provider: Web page: http://econwpa.repec.org

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