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Ambiguity, monetary policy and trend inflation

Riccardo M. Masolo and Francesca Monti ()

No 565, Bank of England working papers from Bank of England

Abstract: We develop a model that can explain the evolution of trend inflation in the United States in the three decades before the Great Recession as a function of the reduction in uncertainty about the monetary policy maker’s behaviour. The model features ambiguity-averse agents and ambiguity regarding the conduct of monetary policy, but is otherwise standard. Trend inflation arises endogenously and has these determinants: the strength with which the central bank responds to inflation, the degree of uncertainty about monetary policy perceived by the private sector, and, if it exists, the inflation target. Given the importance of monetary policy for the determination of trend inflation, we also study optimal monetary policy in the case of lingering ambiguity.

Keywords: Ambiguity aversion; monetary policy; trend inflation. (search for similar items in EconPapers)
JEL-codes: D84 E31 E43 E52 E58 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-upt
Date: 2015-11-13
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Related works:
Working Paper: Ambiguity, Monetary Policy and Trend Inflation (2017) Downloads
Working Paper: Ambiguity, monetary policy and trend inflation (2017) Downloads
Working Paper: Ambiguity, Monetary Policy and Trend Inflation (2017) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0565

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