Inflation Targeting and Liquidity Traps Under Endogenous Credibility
Cars Hommes () and
Staff Working Papers from Bank of Canada
Policy implications are derived for an inflation-targeting central bank, whose credibility is endogenous and depends on its past ability to achieve its targets. This is done in a New Keynesian framework with heterogeneous and boundedly rational expectations. We find that the region of allowed policy parameters is strictly larger than under rational expectations. However, when the zero lower bound on the nominal interest rate is accounted for, self-fulfilling deflationary spirals can occur, depending on the credibility of the central bank. Deflationary spirals can be prevented with a high inflation target and aggressive monetary easing.
Keywords: Business fluctuations and cycles; Credibility; Monetary policy (search for similar items in EconPapers)
JEL-codes: E52 E32 C62 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed
Downloads: (external link)
https://www.bankofcanada.ca/2019/02/staff-working-paper-2019-9/ Abstract (text/html)
https://www.bankofcanada.ca/wp-content/uploads/2019/02/swp2019-9.pdf Full text (application/pdf)
Working Paper: Inflation Targeting and Liquidity Traps under Endogenous Credibility (2015)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:19-9
Access Statistics for this paper
More papers in Staff Working Papers from Bank of Canada 234 Wellington Street, Ottawa, Ontario, K1A 0G9, Canada. Contact information at EDIRC.
Bibliographic data for series maintained by ().