Ambiguity, Monetary Policy and Trend Inflation

Riccardo M. Masolo and Francesca Monti

Journal of the European Economic Association, 2021, vol. 19, issue 2, 839-871

Abstract: Allowing for ambiguity about the behavior of the policymaker in a simple New-Keynesian model gives rise to wedges between long-run inflation expectations, trend inflation, and the inflation target. The degree of ambiguity we measure in Blue Chip survey data helps explain the dynamics of long-run inflation expectations and the inflation trend measured in the US data. Ambiguity also has implications for monetary policy. We show that it is optimal for policymakers to lean against the households’ pessimistic expectations, but also document the limits to the extent the adverse effects of ambiguity can be undone.

Date: 2021
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Related works:
Working Paper: Ambiguity, Monetary Policy and Trend Inflation (2017)
Working Paper: Ambiguity, monetary policy and trend inflation (2017)
Working Paper: Ambiguity, Monetary Policy and Trend Inflation (2017)
Working Paper: Ambiguity, monetary policy and trend inflation (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:oup:jeurec:v:19:y:2021:i:2:p:839-871.

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