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The onsequences of optimism and pessimism or inflation dynamics and monetary policy

Author

Listed:
  • Hasenclever, Stefan
  • Hoffmann, Mathias

Abstract

We study how imperfect information about the persistence of economic funda- mentals affects inflation dynamics and monetary policy. We focus on total factor productivity (TFP) growth, which encompasses demand- and supply-side effects linked to the post-COVID inflation surge. Agents in our model conduct Bayesian learning to infer the persistence of observed TFP growth rates. With imperfect information, waves of optimism and pessimism emerge, leading to a temporary divergence of inflation dynamics from fundamentals in terms of over- and undershooting. This mechanism helps explain the gradual rise of high inflation rates and the cautious monetary policy response in the aftermath of the COVID-19 crisis. Regarding optimal monetary policy, we find that a more hawkish stance is superior at reducing welfare losses and uncertainty arising in the imperfect-information model.

Suggested Citation

  • Hasenclever, Stefan & Hoffmann, Mathias, 2026. "The onsequences of optimism and pessimism or inflation dynamics and monetary policy," Discussion Papers 26/2026, Deutsche Bundesbank.
    • Handle: RePEc:zbw:bubdps:344521
    DOI: 10.71734/DP-2026-26
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    Keywords

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    JEL classification:

    • 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
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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