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Uncertainty about perceived inflation target and monetary policy

  • Aoki, Kosuke
  • Kimura, Takeshi

We analyse the interaction between private agents? uncertainty about inflation target and the central bank's data uncertainty. In our model, private agents update their perceived inflation target and the central bank estimates unobservable economic shocks as well as the perceived inflation target. Under those two uncertainties, the learning process of both private agents and the central bank causes higher order beliefs to become relevant, and this mechanism is capable of generating high persistence and volatility of inflation even though the underlying shocks are purely transitory. We also find that the persistence and volatility become smaller as the inflation target becomes more credible, that is, the private agents' uncertainty about inflation target (and hence the bank's data uncertainty) diminishes.

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Paper provided by Deutsche Bundesbank, Research Centre in its series Discussion Paper Series 1: Economic Studies with number 2007,18.

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Date of creation: 2007
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Handle: RePEc:zbw:bubdp1:6139
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  1. M. Hashem Pesaran & Davide Pettenuzzo & Allan Timmermann, 2006. "Learning, structural instability and present value calculations," Computing in Economics and Finance 2006 529, Society for Computational Economics.
  2. John C. Williams & Athanasios Orphanides, 2004. "The Decline of Activist Stabilization Policy: Natural Rate Misperceptions, Learning, and Expectations," Computing in Economics and Finance 2004 144, Society for Computational Economics.
  3. M. Hashem Pesaran & Davide Pettenuzzo & Allan Timmermann, 2006. "Learning, Structural Instability and Present Value Calculations," CESifo Working Paper Series 1650, CESifo Group Munich.
  4. Svensson, Lars & Woodford, Michael, 2000. "Indicator Variables for Optimal Policy," Seminar Papers 688, Stockholm University, Institute for International Economic Studies.
  5. Christopher J. Erceg and Andrew T. Levin, 2001. "Imperfect Credibility and Inflation Persistence," Computing in Economics and Finance 2001 19, Society for Computational Economics.
  6. Bekaert, Geert & Cho, Seonghoon & Moreno Ibáñez, Antonio, 2006. "New-Keynesian Macroeconomics and the Term Structure," CEPR Discussion Papers 5956, C.E.P.R. Discussion Papers.
  7. Luca Benati, 2003. "Evolving Post-World War II U.K. Economic Performance," Computing in Economics and Finance 2003 171, Society for Computational Economics.
  8. repec:rus:hseeco:318682 is not listed on IDEAS
  9. Athanasios Orphanides, 1998. "Monetary policy evaluation with noisy information," Finance and Economics Discussion Series 1998-50, Board of Governors of the Federal Reserve System (U.S.).
  10. Kosuke Aoki, 2006. "Price-Level Determination Under Dispersed Information And Monetary Policy," The Japanese Economic Review, Japanese Economic Association, vol. 57(3), pages 406-425.
  11. Taylor, Mark P. & Schmidt, Markus & Reitz, Stefan, 2007. "End-user order flow and exchange rate dynamics," Discussion Paper Series 1: Economic Studies 2007,05, Deutsche Bundesbank, Research Centre.
  12. Athanasios Orphanides, 2001. "Monetary Policy Rules Based on Real-Time Data," American Economic Review, American Economic Association, vol. 91(4), pages 964-985, September.
  13. Aoki, Kosuke, 2003. "On the optimal monetary policy response to noisy indicators," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 501-523, April.
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