Transparency, expectations anchoring and inflation target

Guido Ascari, Anna Florio and Alessandro Gobbi

European Economic Review, 2017, vol. 91, issue C, 261-273

Abstract: In various speeches, former Fed Chairman Ben Bernanke contrasted the proposal of setting a higher inflation target by claiming that it could unanchor inflation expectations. A standard New Keynesian framework with learning supports this claim both asymptotically, because a higher inflation target shrinks the E-stability region when a central bank follows a Taylor rule, and in the transition phase, because a higher inflation target slows down the speed of convergence of expectations. Transparency helps anchoring expectations. However, the importance of being transparent diminishes with the level of the inflation target. Finally, the higher the inflation target, the more policy should respond to inflation and the less to output to guarantee E-stability. Hence, a policy that increases both the inflation target and the monetary policy response to output would be “reckless”.

Keywords: Trend Inflation; Learning; Monetary Policy; Transparency (search for similar items in EconPapers)
JEL-codes: C62 D83 E31 E52 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (11)

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Working Paper: Transparency, Expectations Anchoring and the Inflation Target (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:91:y:2017:i:c:p:261-273

DOI: 10.1016/j.euroecorev.2016.11.001

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