Permanent and Transitory Policy Shocks in an Empirical Macro Model with Asymmetric Information

Peter Tinsley and Sharon Kozicki

No 146, Computing in Economics and Finance 2004 from Society for Computational Economics

Abstract: Despite a large literature documenting that the efficacy of monetary policy depends on how inflation expectations are anchored, many monetary policy models assume: (1) the inflation target of moentary policy is constant; and, (2) the inflation target is known by all economic agents. This paper proposes an empirical specification with two policy shocks: permanent changes to the inflation target and transitory perturbations of the short-term real rate. The public sector cannot correctly distinguish between these two shocks and, under incomplete learning, private perceptions of the inflation target will not equal the true target. The paper shows how imperfect policy credibility can affect economic responses to structural shocks, including transition to a new inflation target--a question that cannot be addressed by many commonly used empirical and theoretical models. In contrast to models where all monetary policy actions are transient, the proposed specification implies that sizable movements in historical bond yields and inflation are attributable to perceptions of permanent shocks in target inflation

Keywords: transmission mechanism; learning; policy credibility; time-varying natural rates; shifting endpoint; inflation target; term structure of interest rates (search for similar items in EconPapers)
JEL-codes: D8 E43 E52 (search for similar items in EconPapers)
Date: 2004-08-11
New Economics Papers: this item is included in nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.kc.frb.org/publicat/reswkpap/PDF/RWP03-09.pdf main text (application/pdf)
Our link check indicates that this URL is bad, the error code is: 400 Bad Request

Related works:
Journal Article: Permanent and transitory policy shocks in an empirical macro model with asymmetric information (2005)
Journal Article: Permanent and transitory policy shocks in an empirical macro model with asymmetric information (2004)
Working Paper: Permanent and transitory policy shocks in an empirical macro model with asymmetric information (2003)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:sce:scecf4:146

Access Statistics for this paper

More papers in Computing in Economics and Finance 2004 from Society for Computational Economics Contact information at EDIRC.
Bibliographic data for series maintained by Christopher F. Baum ().