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Positive Trend Inflation and Determinacy in a Medium-Sized New Keynesian Model

Jonas E. Arias, Guido Ascari (), Nicola Branzoli () and Efrem Castelnuovo

No 7122, CESifo Working Paper Series from CESifo Group Munich

Abstract: This paper studies the challenge that increasing the inflation target poses to equilibrium determinacy in a medium-sized New Keynesian model without indexation fitted to the Great Moderation era. For moderate targets of the inflation rate, such as 2 or 4 percent, the probability of determinacy is near one conditional on the monetary policy rule of the estimated model. However, this probability drops significantly conditional on model-free estimates of the monetary policy rule based on real-time data. The difference is driven by the larger response of the federal funds rate to the output gap associated with the latter estimates.

Keywords: trend inflation; determinacy; monetary policy (search for similar items in EconPapers)
JEL-codes: E52 E30 C22 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
Date: 2018
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Related works:
Working Paper: Positive Trend Inflation and Determinacy in a Medium-Sized New Keynesian Model (2018) Downloads
Working Paper: Positive Trend In ation and Determinacy in a Medium-Sized New Keynesian Model (2018) Downloads
Working Paper: POSITIVE TREND INFLATION AND DETERMINACY IN A MEDIUM-SIZED NEW KEYNESIAN MODEL (2017) Downloads
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