Credibility is not enough: the importance of common knowledge to anchor expectations

Marcelo Griebeler () and Guilherme Stein
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Marcelo Griebeler: Federal University of Rio Grande do Sul

Economics Bulletin, 2018, vol. 38, issue 2, 916-920

Abstract: In a linear model, we show that when individuals form their inflation expectations taking into account the others' expectations, credibility - defined as the individual belief that the central bank is speaking the truth and has enough technical capacity to achieve the announced targets - is not sufficient to anchor the aggregate expectations. Instead, we show that it is necessary to add common knowledge of the individual credibility in order to guarantee anchoring.

Keywords: inflation expectations; credibility; common knowledge. (search for similar items in EconPapers)
JEL-codes: E4 E5 (search for similar items in EconPapers)
Date: 2018-04-30
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