Permanent and transitory policy shocks in an empirical macro model with asymmetric information

  • Despite a large literature documenting that the efficacy of monetary policy depends on how inflation expectations are anchored, many monetary policy models assume: (1) the inflation target of monetary policy is constant; and, (2) the inflation target is known by all economic agents. This paper proposes an empirical specification with two policy shocks: permanent changes to the inflation target and transitory perturbations of the short-term real rate. The public sector cannot correctly distinguish between these two shocks and, under incomplete learning, private perceptions of the inflation target will not equal the true target. The paper shows how imperfect policy credibility can affect economic responses to structural shocks, including transition to a new inflation target - a question that cannot be addressed by many commonly used empirical and theoretical models. In contrast to models where all monetary policy actions are transient, the proposed specification implies that sizable movements in historical bond yields and inflation are attributable to perceptions of permanent shocks in target inflation.

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Metadaten
Author:Sharon Kozicki, Peter A. Tinsley
URN:urn:nbn:de:hebis:30-10461
Parent Title (German):Center for Financial Studies (Frankfurt am Main): CFS working paper series ; No. 2003,41
Series (Serial Number):CFS working paper series (2003, 41)
Document Type:Working Paper
Language:English
Year of Completion:2003
Year of first Publication:2003
Publishing Institution:Universit├Ątsbibliothek Johann Christian Senckenberg
Release Date:2005/06/13
Tag:inflation target; learning; policy credibility; shifting endpoint; term structure of interest; time-varying natural rate; transmission mechanism
GND Keyword:Geldpolitik; Inflation Targeting
Issue:This version: October 28, 2003
HeBIS-PPN:204006058
Institutes:Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS)
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
Licence (German):License LogoDeutsches Urheberrecht