Monetary policy and inflationary shocks under imperfect credibility

Matthieu Darracq Paries and Stéphane Moyen

No 1065, Working Paper Series from European Central Bank

Abstract: This paper quantifies the deterioration of achievable tabilization outcomes when monetary policy operates under imperfect credibility and weak anchoring of long-term expectations. Within a medium-scale DSGE model, we introduce through a simple signal extraction problem, an imperfect knowledge configuration where rice and wage setters wrongly doubt about the determination of the central bank to leave unchanged its long-term inflation objective in the face of inflationary shocks. The magnitude of private sector learning has been calibrated to match the volatility of US inflation expectations at long horizons. Given such illustrative calibrations, we find that the costs of aintaining a given inflation volatility under weak credibility could amount to 0.25 pp of output gap standard deviation. JEL Classification: E4, E5, F4

Keywords: Imperfect credibility; monetary policy; signal extraction (search for similar items in EconPapers)
Date: 2009-06
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
Note: 604093
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Citations: View citations in EconPapers (1)

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Journal Article: Monetary policy and inflationary shocks under imperfect credibility (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20091065

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