Should Central Banks Respond to the Persistence of Shocks?

Jean-Bernard Chatelain and Kirsten Ralf

Annals of Economics and Statistics, 2025, issue 160, 15-34

Abstract: If there is a non-negligible sensitivity of inflation to demand or supply exogenous and highly persistent shocks (which are not nearly fully damped in six quarters), it is optimal for central banks policy instrument to respond not only to inflation deviation from its target but also, in addition, to respond relatively more to this shock, the more it is persistent, and early enough. This policy instrument distinct response to persistent shocks in addition to its response to inflation is optimal because it decreases the sensitivity of inflation to the persistent shock. Then, inflation converges to its long run target faster than the highly persistent exogenous shock.

Keywords: Persistent Exogenous Shock; Optimal Monetary Policy; Interest Rate Rule. (search for similar items in EconPapers)
JEL-codes: C61 C62 E31 E52 E58 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:adr:anecst:y:2025:i:160:p:15-34

DOI: 10.2307/48857611

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