Learning the inflation target

Ricardo Cavaco Nunes

Macroeconomics from EconWPA

Abstract: The New Keynesian model with rational expectations unrealistically predicts that unanticipated credible changes in the inflation target lead to an immediate jump in the inflation level while the output gap is unaffected. We set up a theoretical model where agents learn the behaviour of the economy. In this context, a permanent change in the inflation target leads inflation to respond sluggishly while the output gap is temporarily affected. We extend the model to allow for both learners and forward looking agents to coexist. The calibrated model explains quite well transition dynamics during the Volker disinflation.

Keywords: Learning; Policy shifts; Volker disinflation (search for similar items in EconPapers)
JEL-codes: D83 E31 E52 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Date: 2005-04-25, Revised 2005-04-26
Note: Type of Document - pdf; pages: 36
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http://129.3.20.41/eps/mac/papers/0504/0504033.pdf (application/pdf)

Related works:
Journal Article: LEARNING THE INFLATION TARGET (2009)
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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpma:0504033

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