Monetary Policy Regimes and Beliefs

David Andolfatto () and Paul Gomme ()

No 48, Cahiers de recherche CREFE / CREFE Working Papers from CREFE, Université du Québec à Montréal

Abstract: Recent monetary history has been characterized by monetary authorities that appear to shift periodically between distinct policy regimes associated with higher or lower average rates of money creation. As policy regimes are not directly observable and as the rate of monetary expansion varies for reasons other than regime changes, the general public must form beliefs over current monetary policy based on historical realizations of money growth rates. Depending on the parameters governing the behaviour of monetary policy, beliefs (and therefore inflation forecasts) may evolve very slowly in the wake of actual regime changes, thereby exacerbating the costs of a disinflation policy. The quantitative importance of slowly adjusting beliefs is evaluated in the context of a computable general equilibrium model.

L'histoire monétaire récente a été marquée par des autorités monétaires choisissant périodiquement de passer d'un régime à un autre, régimes se caractérisant par des taux de création monétaire moyens distinctement plus ou moins élevés. Comme ces régimes ne sont pas directement observables et et que le taux de croissance monétaire varie pour d'autres raisons que celles liées au régime, le public doit former des croyances concernant la politique monétaire courante basées sur les réalisations historiques des taux de croissance de la monnaie. Suivant les paramètres gouvernant le comportement de la politique monétaire, les croyances (et ainsi les prévisions d'inflation) peuvent évoluer fort lentement par rapport aux vrais changements de régimes, ce qui amplifie les coûts d'une politique désinflationniste. L'importance quantitative des croyances à évolution lente est évaluée dans le cadre d'un modèle d'équilibre général calculable.

Keywords: monetary policy; regime switching; beliefs (search for similar items in EconPapers)
JEL-codes: E52 E42 E31 E13 (search for similar items in EconPapers)
Date: 1997-05, Revised 2001-04
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Related works:
Journal Article: Monetary Policy Regimes and Beliefs (2003)
Working Paper: Monetary policy regimes and beliefs (2001)
Working Paper: Monetary policy regimes and beliefs (1997)
Working Paper: Monetary Policy Regimes and Beliefs (1997)
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