Monetary policy & anchored expectations: an endogenous gain learning model

Laura Gáti

No 2685, Working Paper Series from European Central Bank

Abstract: This paper analyzes monetary policy in a model with a potential unanchoring of inflation expectations. The degree of unanchoring is given by how sensitively the public’s long-run inflation expectations respond to inflation surprises. I find that optimal policy moves the interest rate aggressively when expectations unanchor, allowing the central bank to accommodate inflation fluctuations when expectations are well-anchored. Furthermore, I estimate the model-implied relationship that determines the extent of unanchoring. The data suggest that the expectations process is nonlinear and asymmetric: expectations respond more sensitively to large or downside surprises than to smaller or upside ones. JEL Classification: E52, E71, D84

Keywords: anchored expectations; behavioral macro; optimal monetary policy (search for similar items in EconPapers)
Date: 2022-07
New Economics Papers: this item is included in nep-ban, nep-cba and nep-mon
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Citations: View citations in EconPapers (1)

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Journal Article: Monetary policy & anchored expectations—An endogenous gain learning model (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20222685

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