Uncertainty about perceived inflation target and monetary policy

Kosuke Aoki and Takeshi Kimura ()

No 2007,18, Discussion Paper Series 1: Economic Studies from Deutsche Bundesbank, Research Centre

Abstract: 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.

Keywords: Monetary policy; central banks (search for similar items in EconPapers)
JEL-codes: E52 E58 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Date: Written 2007
View list of references

Downloads: (external link)
http://opus.zbw-kiel.de/volltexte/2007/6139/pdf/200718dkp.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Access Statistics for this paper

More papers in Discussion Paper Series 1: Economic Studies from Deutsche Bundesbank, Research Centre
Contact information at EDIRC.
Series data maintained by ZBW - German National Library for Economics ().