Why Central Banks Undershot Their Inflation Targets
In: Politická ekonomie: teorie, modelování, aplikace, Volume 53, Issue 2, p. 185-202
ISSN: 0032-3233
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In: Politická ekonomie: teorie, modelování, aplikace, Volume 53, Issue 2, p. 185-202
ISSN: 0032-3233
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.
BASE
In: Discussion paper
In: Series 1, Economic studies 18/2007
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.
In: Journal of economic dynamics & control, Volume 113, p. 103858
ISSN: 0165-1889
In: The Canadian journal of economics: the journal of the Canadian Economics Association = Revue canadienne d'économique, Volume 51, Issue 3, p. 1029-1055
ISSN: 1540-5982
AbstractRecent international experience with the effective lower bound on nominal interest rates has rekindled interest in the benefits of inflation targets above 2%. We evaluate whether an increase in the inflation target to 3% or 4% could improve macroeconomic stability in the Canadian economy. We find that the magnitude of the benefits hinges critically on two elements: (i) the availability and effectiveness of unconventional monetary policy (UMP) tools at the effective lower bound and (ii) the level of the real neutral interest rate. In particular, we show that when the real neutral rate is in line with the central tendency of estimates, raising the inflation target yields some improvement in macroeconomic outcomes. There are only modest gains if effective UMP tools are available. In contrast, with a deeply negative real neutral rate, a higher inflation target substantially improves macroeconomic stability regardless of UMP.
SSRN
In: World development: the multi-disciplinary international journal devoted to the study and promotion of world development, Volume 22, Issue 8, p. 1105
ISSN: 0305-750X
In: Journal of Business & Economics Research, Volume 1, Issue 4, p. 61-74
SSRN
SSRN
Working paper
In: CEPAL review, Issue 117, p. 137-146
World Affairs Online
In: CAMA Working Paper No. 27/2017
SSRN
Working paper
In: Journal of post-Keynesian economics, Volume 28, Issue 4, p. 689-703
ISSN: 1557-7821
In: World development: the multi-disciplinary international journal devoted to the study and promotion of world development, Volume 22, Issue 8, p. 1105-1117
In: The Manchester School, Volume 82, Issue 2, p. 160-182
ISSN: 1467-9957
This paper investigates the implicit inflation targets of inflation targeting (IT) central banks (CBs). The implicit (perceived) inflation targets of IT CBs derived from their actions (policy interest rates) are calculated before and after IT adoption. We conclude that after adoption of IT implicit targets become significantly lower. Other factors that cause CBs to change their implicit targets are inflation, exchange rate and trade balance. Finally, we find that CBs that do not follow their announced targets miss their inflation targets. The results indicate that IT CBs should follow their announced targets when setting policy interest rates.