Imperfect Knowledge Inflation Expectations And Monetary Policy

Author : Athanasios Orphanides,John C. Williams
Publisher : Unknown
Page : 46 pages
File Size : 49,7 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 : Vítor Gaspar,Otmar Issing,Oreste Tristani,David Vestin
Publisher : Cambridge University Press
Page : 160 pages
File Size : 45,9 Mb
Release : 2006-02-16
Category : Business & Economics
ISBN : 1139448560

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Imperfect Knowledge and Monetary Policy by Vítor Gaspar,Otmar Issing,Oreste Tristani,David Vestin Pdf

Based on lectures given as part of The Stone Lectures in Economics, this book discusses the problem of formulating monetary policy in practice, under the uncertain circumstances which characterize the real world. The first lecture highlights the limitations of decision rules suggested by the academic literature and recommends an approach involving, first, a firm reliance on the few fundamental and robust results of monetary economics and, secondly, a pragmatic attitude to policy implementation, taking into consideration lessons from central banking experience. The second lecture revisits Milton Friedman's questions about the effects of active stabilization policies on business cycle fluctuations. It explores the implications of a simple model where the policy maker has imperfect knowledge about potential output and the private sector forms expectations according to adaptive learning. This lecture shows that imperfect knowledge limits the scope for active stabilization policy and strengthens the case for conservatism.

Author : Athanasios Orphanides,John C. Williams
Publisher : Unknown
Page : 70 pages
File Size : 55,6 Mb
Release : 2006
Category : Anti-inflationary policies
ISBN : CORNELL:31924103599076

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Inflation Targeting Under Imperfect Knowledge by Athanasios Orphanides,John C. Williams Pdf

Author : Athanasios Orphanides,John C. Williams
Publisher : Unknown
Page : 76 pages
File Size : 55,9 Mb
Release : 2007
Category : Monetary policy
ISBN : CORNELL:31924107012506

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Robust Monetary Policy with Imperfect Knowledge by Athanasios Orphanides,John C. Williams Pdf

We examine the performance and robustness properties of monetary policy rules in an estimated macroeconomic model in which the economy undergoes structural change andwhere private agents and the central bank possess imperfect knowledge about the true structure of the economy. Policymakers follow an interest rate rule aiming to maintain price stability and to minimize fluctuations of unemployment around its natural rate but areuncertain about the economy's natural rates of interest and unemployment and how private agents form expectations. In particular, we consider two models of expectations formation :rational expectations and learning. We show that in this environment the ability to stabilize the real side of the economy is significantly reduced relative to an economy under rational expectations with perfect knowledge. Furthermore, policies that would be optimal under perfect knowledge can perform very poorly if knowledge is imperfect. Efficient policies that take account of private learning and misperceptions of natural rates call for greater policy inertia, a more aggressive response to inflation, and a smaller response to the perceived unemployment gap than would be optimal if everyone had perfect knowledge of the economy. We show that such policies are quite robust to potential misspecification of private sector learning and the magnitude of variation in natural rates.

Author : Ben S. Bernanke,Michael Woodford
Publisher : University of Chicago Press
Page : 469 pages
File Size : 46,9 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 : Athanasios Orphanides,John Carroll Williams
Publisher : DIANE Publishing
Page : 46 pages
File Size : 41,5 Mb
Release : 2010
Category : Business & Economics
ISBN : 9781437935615

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Monetary Policy Mistakes and the Evolution of Inflation Expectations by Athanasios Orphanides,John Carroll Williams Pdf

What monetary policy framework, if adopted by the Federal Reserve, would have avoided the Great Inflation of the 1960s and 1970s? The authors use counterfactual simulations of an estimated model of the U.S. economy to evaluate alternative monetary policy strategies. The authors document that policymakers at the time both had an overly optimistic view of the natural rate of unemployment and put a high priority on achieving full employment. They show that in the presence of realistic informational imperfections and with an emphasis on stabilizing economic activity, an optimal control approach would have failed to keep inflation expectations well anchored, resulting in highly volatile inflation during the 1970s. Charts and tables.

Author : Athanasios Orphanides,John Carroll Williams
Publisher : Unknown
Page : 38 pages
File Size : 40,7 Mb
Release : 2005
Category : Monetary policy
ISBN : CORNELL:31924100654676

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Monetary Policy with Imperfect Knowledge by Athanasios Orphanides,John Carroll Williams Pdf

We examine the performance and robustness of monetary policy rules when the central bank and the public have imperfect knowledge of the economy and continuously update their estimates of model parameters. We find that versions of the Taylor rule calibrated to perform well under rational expectations with perfect knowledge perform very poorly when agents are learning and the central bank faces uncertainty regarding natural rates. In contrast, difference rules, in which the change in the interest rate is determined by the inflation rate and the change in the unemployment rate, perform well when knowledge is both perfect and imperfect.

Author : Man-Keung Tang,Mr.Xiangrong Yu
Publisher : International Monetary Fund
Page : 34 pages
File Size : 45,9 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.

Author : Athanasios Orphanides
Publisher : Unknown
Page : 0 pages
File Size : 51,5 Mb
Release : 2003
Category : Electronic
ISBN : OCLC:1406866267

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Imperfect Kowledge, Inflation Expectations, and Monetary Policy by Athanasios Orphanides Pdf

Author : Mark Gertler,Kenneth S. Rogoff
Publisher : MIT Press
Page : 436 pages
File Size : 47,6 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 : Peter J. N. Sinclair
Publisher : Routledge
Page : 402 pages
File Size : 49,5 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 : Pär Österholm,Spencer Dale,Athanasios Orphanides
Publisher : International Monetary Fund
Page : 36 pages
File Size : 47,5 Mb
Release : 2008-03
Category : Business & Economics
ISBN : UCSD:31822036950053

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Imperfect Central Bank Communication - Information Versus Distraction by Pär Österholm,Spencer Dale,Athanasios Orphanides Pdf

Much of the information communicated by central banks is noisy or imperfect. This paper considers the potential benefits and limitations of central bank communications in a model of imperfect knowledge and learning. It is shown that the value of communicating imperfect information is ambiguous. There is a risk that the central bank can distract the public; this means that the central bank may prefer to focus its communication policies on the information it knows most about. Indeed, conveying more certain information may improve the public's understanding to the extent that it "crowds out" a role for communicating imperfect information.

Author : Vítor Gaspar,Otmar Issing,Oreste Tristani,David Vestin
Publisher : Cambridge University Press
Page : 152 pages
File Size : 40,9 Mb
Release : 2006-02-16
Category : Business & Economics
ISBN : 0521854865

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Imperfect Knowledge and Monetary Policy by Vítor Gaspar,Otmar Issing,Oreste Tristani,David Vestin Pdf

Based on lectures given as part of The Stone Lectures in Economics, this book discusses the problem of formulating monetary policy in practice, under the uncertain circumstances which characterize the real world. How should central banks set monetary policy? In which way should they take uncertainty into account when designing a monetary policy strategy? Should they respond to shocks aggressively or cautiously? These questions are discussed both with reference to the experience of the Bundesbank and of the European Central Bank and in relation to a simple stylized economic model.

Author : Anke Weber
Publisher : International Monetary Fund
Page : 44 pages
File Size : 54,5 Mb
Release : 2010-04-01
Category : Business & Economics
ISBN : 9781451982510

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Monetary Policy Committees, Learning, and Communication by Anke Weber Pdf

This paper considers optimal communication by monetary policy committees in a model of imperfect knowledge and learning. The main policy implications are that there may be costs to central bank communication if the public is perpetually learning about the committee''s decision-making process and policy preferences. When committee members have heterogeneous policy preferences, welfare is greater under majority voting than under consensus decision-making. Furthermore, central bank communication under majority voting is more likely to be beneficial in this case. It is also shown that a chairman with stable policy preferences who carries significant weight in the monetary policy decision-making process is welfare enhancing.

Author : Helmut Wagner
Publisher : Unknown
Page : 92 pages
File Size : 52,5 Mb
Release : 2007
Category : Monetary policy
ISBN : IND:30000124806245

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Information and Uncertainty in the Theory of Monetary Policy by Helmut Wagner Pdf