Monetary policy & anchored expectations: an endogenous gain learning model
No 2685, Working Paper Series from European Central Bank
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)
New Economics Papers: this item is included in nep-ban, nep-cba and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20222685
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