Imperfect Credibility And Inflation Persistence

Author : Mr.Michael Kumhof,Mr.Eric Parrado,Mr.Luis Felipe Céspedes
Publisher : International Monetary Fund
Page : 28 pages
File Size : 41,5 Mb
Release : 2003-04-01
Category : Business & Economics
ISBN : 9781451851045

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Pricing Policies and Inflation Inertia by Mr.Michael Kumhof,Mr.Eric Parrado,Mr.Luis Felipe Céspedes Pdf

This paper provides a monetary model with nominal rigidities that differs from the conventional New Keynesian model with firms setting pricing policies instead of price levels. In response to permanent or highly persistent monetary policy shocks this model generates the empirically observed slow (inertial) and prolonged (persistent) reaction of the inflation rate, and also the recession that typically accompanies moderate disinflations. The reason is that firms respond to such shocks mostly through a change in the long-run or inflation updating component of their pricing policies. With staggered pricing policies there is a time lag before this is reflected in aggregate inflation.

Author : Athanasios Orphanides,John C. Williams
Publisher : Unknown
Page : 46 pages
File Size : 42,7 Mb
Release : 2002
Category : Monetary policy
ISBN : UCSD:31822031629231

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Imperfect Knowledge, Inflation Expectations, and Monetary Policy by Athanasios Orphanides,John C. Williams Pdf

This paper investigates the role that imperfect knowledge about the structure of the economy plays in the formation of expectations, macroeconomic dynamics, and the efficient formulation of monetary policy. Economic agents rely on an adaptive learning technology to form expectations and to update continuously their beliefs regarding the dynamic structure of the economy based on incoming data. The process of perpetual learning introduces an additional layer of dynamic interaction between monetary policy and economic outcomes. We find that policies that would be efficient under rational expectations can perform poorly when knowledge is imperfect. In particular, policies that fail to maintain tight control over inflation are prone to episodes in which the public's expectations of inflation become uncoupled from the policy objective and stagflation results, in a pattern similar to that experienced in the United States during the 1970s. Our results highlight the value of effective communication of a central bank's inflation objective and of continued vigilance against inflation in anchoring inflation expectations and fostering macroeconomic stability.

Author : Ning Zeng
Publisher : Unknown
Page : 96 pages
File Size : 52,5 Mb
Release : 2014-04
Category : Business & Economics
ISBN : 1909757314

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Inflation Since World War Ii Persistence, Credibility and Stability by Ning Zeng Pdf

This book addresses inflation persistence, monetary credibility and stability through modelling US macroeconomic and financial data in the post-war period. First, an ARFIMA-EGARCH model is used to generate estimations capturing the stylized facts of inflation dynamics and examine the links between the inflation rate, volatility and inflation persistence. Then a modified and reduced form of accelerationist Phillips curve is employed to analyse the inflation-unemployment trade-off and thus assess monetary policy credibility. Finally, a conditional constant correlation bivariate EGARCH-in-mean model is used to investigate interactions among inflation rates, stock returns and their respective volatilities. Results provide new evidence that inflation and its volatility are involved in more active interactions in a high inflation environment, whereas less or little related when the inflation rate is lower. The core findings also suggest that the degree of inflation persistence is a reliable measure of monetary credibility. Moreover, promoting monetary stability contributes to more mutual interactions between inflation rates, stock returns and their respective volatilities. In particular, common stock is a more effective hedge against inflation, and the level of the inflation rate is central to explaining the relation between the two volatilities.

Author : Christopher J. Erceg,Andrew T. Levin
Publisher : Unknown
Page : 44 pages
File Size : 41,8 Mb
Release : 2001
Category : Inflation (Finance)
ISBN : CORNELL:31924090786710

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Imperfect Credibility and Inflation Persistence by Christopher J. Erceg,Andrew T. Levin Pdf

In this paper, we formulate a dynamic general equilibrium model with staggered nominal contracts, in which households and firms use optimal filtering to disentangle persistent and transitory shifts in the monetary policy rule. The calibrated model accounts quite well for the dynamics of output and inflation during the Volcker disinflation, and implies a sacrifice ratio very close to the estimated value. Our approach indicates that inflation persistence and substantial costs of disinflation can be generated in an optimizing-agent framework, without relaxing the assumption of rational expectations or relying on arbitrary modifications to the aggregate supply relation.

Author : Peter J. N. Sinclair
Publisher : Routledge
Page : 402 pages
File Size : 55,6 Mb
Release : 2009-12-16
Category : Business & Economics
ISBN : 9781135179779

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Inflation Expectations by Peter J. N. Sinclair Pdf

Inflation is regarded by the many as a menace that damages business and can only make life worse for households. Keeping it low depends critically on ensuring that firms and workers expect it to be low. So expectations of inflation are a key influence on national economic welfare. This collection pulls together a galaxy of world experts (including Roy Batchelor, Richard Curtin and Staffan Linden) on inflation expectations to debate different aspects of the issues involved. The main focus of the volume is on likely inflation developments. A number of factors have led practitioners and academic observers of monetary policy to place increasing emphasis recently on inflation expectations. One is the spread of inflation targeting, invented in New Zealand over 15 years ago, but now encompassing many important economies including Brazil, Canada, Israel and Great Britain. Even more significantly, the European Central Bank, the Bank of Japan and the United States Federal Bank are the leading members of another group of monetary institutions all considering or implementing moves in the same direction. A second is the large reduction in actual inflation that has been observed in most countries over the past decade or so. These considerations underscore the critical – and largely underrecognized - importance of inflation expectations. They emphasize the importance of the issues, and the great need for a volume that offers a clear, systematic treatment of them. This book, under the steely editorship of Peter Sinclair, should prove very important for policy makers and monetary economists alike.

Author : Ben S. Bernanke,Michael Woodford
Publisher : University of Chicago Press
Page : 469 pages
File Size : 45,7 Mb
Release : 2007-11-01
Category : Business & Economics
ISBN : 9780226044736

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The Inflation-Targeting Debate by Ben S. Bernanke,Michael Woodford Pdf

Over the past fifteen years, a significant number of industrialized and middle-income countries have adopted inflation targeting as a framework for monetary policymaking. As the name suggests, in such inflation-targeting regimes, the central bank is responsible for achieving a publicly announced target for the inflation rate. While the objective of controlling inflation enjoys wide support among both academic experts and policymakers, and while the countries that have followed this model have generally experienced good macroeconomic outcomes, many important questions about inflation targeting remain. In Inflation Targeting, a distinguished group of contributors explores the many underexamined dimensions of inflation targeting—its potential, its successes, and its limitations—from both a theoretical and an empirical standpoint, and for both developed and emerging economies. The volume opens with a discussion of the optimal formulation of inflation-targeting policy and continues with a debate about the desirability of such a model for the United States. The concluding chapters discuss the special problems of inflation targeting in emerging markets, including the Czech Republic, Poland, and Hungary.

Author : Charles Freedman,Mr.Douglas Laxton
Publisher : International Monetary Fund
Page : 27 pages
File Size : 42,7 Mb
Release : 2009-04-01
Category : Business & Economics
ISBN : 9781451872330

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Why Inflation Targeting? by Charles Freedman,Mr.Douglas Laxton Pdf

This is the second chapter of a forthcoming monograph entitled "On Implementing Full-Fledged Inflation-Targeting Regimes: Saying What You Do and Doing What You Say." We begin by discussing the costs of inflation, including their role in generating boom-bust cycles. Following a general discussion of the need for a nominal anchor, we describe a specific type of monetary anchor, the inflation-targeting regime, and its two key intellectual roots-the absence of long-run trade-offs and the time-inconsistency problem. We conclude by providing a brief introduction to the way in which inflation targeting works.

Author : Mark Gertler,Kenneth S. Rogoff
Publisher : MIT Press
Page : 436 pages
File Size : 49,6 Mb
Release : 2004
Category : Business & Economics
ISBN : 0262572214

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NBER Macroeconomics Annual 2003 by Mark Gertler,Kenneth S. Rogoff Pdf

The NBER Macroeconomics Annual presents pioneering work in macroeconomics by leading academic researchers to an audience of public policymakers and the academic community. Each commissioned paper is followed by comments and discussion. This year's edition provides a mix of cutting-edge research and policy analysis on such topics as productivity and information technology, the increase in wealth inequality, behavioral economics, and inflation.

Author : Andreas Beyer
Publisher : Unknown
Page : 80 pages
File Size : 47,8 Mb
Release : 2016
Category : Electronic
ISBN : OCLC:1306165175

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Opting Out of the Great Inflation by Andreas Beyer Pdf

During the turbulent 1970s and 1980s the Bundesbank established an outstanding reputation in the world of central banking. Germany achieved a high degree of domestic stability and provided safe haven for investors in times of turmoil in the international financial system. Eventually the Bundesbank provided the role model for the European Central Bank. Hence, we examine an episode of lasting importance in European monetary history. The purpose of this paper is to highlight how the Bundesbank monetary policy strategy contributed to this success. We analyze the strategy as it was conceived, communicated and refined by the Bundesbank itself. We propose a theoretical framework (following Söderström, 2005) where monetary targeting is interpreted, first and foremost, as a commitment device. In our setting, a monetary target helps anchoring inflation and inflation expectations. We derive an interest rate rule and show empirically that it approximates the way the Bundesbank conducted monetary policy over the period 1975-1998. We compare the Bundesbank's monetary policy rule with those of the FED and of the Bank of England. We find that the Bundesbank's policy reaction function was characterized by strong persistence of policy rates as well as a strong response to deviations of inflation from target and to the activity growth gap. In contrast, the response to the level of the output gap was not significant. In our empirical analysis we use real-time data, as available to policymakers at the time.

Author : Perry Warjiyo,Solikin M. Juhro
Publisher : Emerald Group Publishing
Page : 487 pages
File Size : 52,8 Mb
Release : 2019-07-25
Category : Business & Economics
ISBN : 9781789737530

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Central Bank Policy by Perry Warjiyo,Solikin M. Juhro Pdf

Central Bank Policy: Theory and Practice analyses various policies, theories and practices adopted by central banks, as well as the institutional arrangements underlying the principles of good governance in policy-making. It is the first book to comprehensively discuss the latest theories and practices of central bank policy.

Author : Mr.Rudolfs Bems,Francesca G Caselli,Francesco Grigoli,Bertrand Gruss,Weicheng Lian
Publisher : International Monetary Fund
Page : 31 pages
File Size : 41,9 Mb
Release : 2018-12-11
Category : Business & Economics
ISBN : 9781484392232

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Expectations' Anchoring and Inflation Persistence by Mr.Rudolfs Bems,Francesca G Caselli,Francesco Grigoli,Bertrand Gruss,Weicheng Lian Pdf

Understanding the sources of inflation persistence is crucial for monetary policy. This paper provides an empirical assessment of the influence of inflation expectations' anchoring on the persistence of inflation. We construct a novel index of inflation expectations' anchoring using survey-based inflation forecasts for 45 economies starting in 1989. We then study the response of consumer prices to terms-of-trade shocks for countries with flexible exchange rates. We find that these shocks have a significant and persistent effect on consumer price inflation when expectations are poorly anchored. By contrast, inflation reacts by less and returns quickly to its pre-shock level when expectations are strongly anchored.

Author : Davide Debortoli,Mr.Jinill Kim,Jesper Lindé,Mr.Ricardo C Nunes
Publisher : International Monetary Fund
Page : 56 pages
File Size : 44,7 Mb
Release : 2017-07-21
Category : Business & Economics
ISBN : 9781484311752

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Designing a Simple Loss Function for Central Banks by Davide Debortoli,Mr.Jinill Kim,Jesper Lindé,Mr.Ricardo C Nunes Pdf

Yes, it makes a lot of sense. This paper studies how to design simple loss functions for central banks, as parsimonious approximations to social welfare. We show, both analytically and quantitatively, that simple loss functions should feature a high weight on measures of economic activity, sometimes even larger than the weight on inflation. Two main factors drive our result. First, stabilizing economic activity also stabilizes other welfare relevant variables. Second, the estimated model features mitigated inflation distortions due to a low elasticity of substitution between monopolistic goods and a low interest rate sensitivity of demand. The result holds up in the presence of measurement errors, with large shocks that generate a trade-off between stabilizing inflation and resource utilization, and also when ensuring a low probability of hitting the zero lower bound on interest rates.

Author : Juan Pablo Medina Guzman,Claudio Soto
Publisher : International Monetary Fund
Page : 43 pages
File Size : 45,7 Mb
Release : 2014-02-13
Category : Business & Economics
ISBN : 9781484306420

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Commodity Price Shocks and Imperfectly Credible Macroeconomic Policies in Commodity-Exporting Small Open Economies by Juan Pablo Medina Guzman,Claudio Soto Pdf

In this paper, we analyze how lack of credibility and transparency of monetary and fiscal policies undermines the effectiveness of macroeconomic policies to isolate the economy from commodity price fluctuations. We develop a general equilibrium model for a commodity-exporting economy where macro policies are conducted through rules. We show that the responses of output, aggregate demand, and inflation to an increase in commodity price are magnified when these rules are imperfectly credible and lack transparency. If policies are imperfectly credible, then transparency helps private agents to learn the systematic behavior of the autorities, reducing the effects of commodity prices shocks. Coherent with the model, we show cross-country evidence that monetary policy transparency and fiscal credibility reduce the incidence of export price volatility on output volatility. Also, our results indicate that having an explicit fiscal rule and an inflation targeting regime contribute to isolate the economy from terms of trade fluctuations.

Author : Jeremy Bay Rudd,Karl Whelan
Publisher : Unknown
Page : 50 pages
File Size : 51,7 Mb
Release : 2003
Category : Inflation (Finance)
ISBN : CORNELL:31924097215630

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Inflation Targets, Credibility, and Persistence in a Simple Sticky-price Framework by Jeremy Bay Rudd,Karl Whelan Pdf

Author : Man-Keung Tang,Mr.Xiangrong Yu
Publisher : International Monetary Fund
Page : 34 pages
File Size : 45,6 Mb
Release : 2011-08-01
Category : Business & Economics
ISBN : 9781463902193

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Communication of Central Bank Thinking and Inflation Dynamics by Man-Keung Tang,Mr.Xiangrong Yu Pdf

This paper studies the role of central bank communication of its economic assessment in shaping inflation dynamics. Imperfect information about the central bank's assessment - or the basis for monetary policy decisions - could complicate the private sector's learning about its policy response function. We show how clear central bank communication, which facilitates agents' understanding of policy reasoning, could bring about less volatile inflation and interest rate dynamics, and afford the authorities with greater policy flexibility. We then estimate a simple monetary model to fit the Mexican economy, and use the suggested paramters to illustrate the model's quantitative implications in scenarios where the timing, nature and persistence of shocks are uncertain.