Inflation shocks and the New Keynesian model: When should central banks fear inflation expectations?

Lucio Gobbi, Ronny Mazzocchi and Roberto Tamborini

The North American Journal of Economics and Finance, 2025, vol. 80, issue C

Abstract: When inflation picks up, central banks fear that de-anchored expectations trigger ever increasing inflation, but this scenario does not materialize in the standard New Keynesian (NK) blueprint for central banks. Divergent inflation processes may result introducing boundedly rational beliefs about future inflation that de-anchor endogenously, together with indexed wages and persistent shocks. However, by means of simulations of the model, we find that the relevant parameters should be far beyond their consensus empirical values. Either the concern with the de-anchoring of inflation expectations is overrated or it should be given different theoretical underpinnings than the NK ones.

Keywords: Cost-push inflation; New Keynesian models for monetary policy; Wage-price spiral; De-anchoring of inflation expectations (search for similar items in EconPapers)
JEL-codes: E17 E3 E5 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:80:y:2025:i:c:s1062940825001482

DOI: 10.1016/j.najef.2025.102508

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