The Power of Open-Mouth Policies

Vadym Lepetyuk, Serguei Maliar and John Taylor

No 16262, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Central bank's announcements about future monetary policy make economic agents to react before the announced policy takes place. We evaluate the anticipation effects of such announcements in the context of a realistic dynamic economic model of central banking. In our experiments, we consider temporary and permanent anticipated changes in policy rules including changes in inflation target, natural rate of interest and Taylor-rule coefficients, as well as anticipated switches from inflation targeting to price-level targeting and average inflation targeting. We show that the studied nonrecurrent news shocks about future policies have sizable anticipation effects on the economy. Our methodological contribution is to develop a novel perturbation-based framework for constructing nonstationary solutions to economic models with nonrecurrent news shocks.

Keywords: News shocks; Turnpike theorem; Time-dependent models; Nonstationary models; Unbalanced growth; Time-varying parameters; Regime switches; Monetary policies; Price-level targeting; Average inflation targeting (search for similar items in EconPapers)
JEL-codes: C61 C63 C68 E31 E52 (search for similar items in EconPapers)
Date: 2021-06
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