The Return of Inflation: Look-Through Policy Under Incomplete Information
Ginters Buss and
Guido Traficante
CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University
Abstract:
This paper studies monetary policy in a New Keynesian model with incomplete information regarding the persistence of cost-push shocks. The central bank and the private sector gradually learn about the persistence of the shock as it propagates through the economy. The central bank adopts a look-through policy in response to temporary cost-push shocks; otherwise, it follows a Taylor rule. If agents initially believe the cost-push shock to be temporary, while the true shock is persistent, it takes some time for the central bank, acting initially under an incorrect assumption, to realise its mistake and switch to monetary tightening. As a result, the actual inflation is higher than in a complete information case. Data-dependent discretionary early liftoff strategies can partially mitigate the effects of the initial policy misjudgment. Contrary to the full-information conditions, the findings cast doubt on the effectiveness of look-through policies in environments of incomplete information, irrespective of the actual persistence of the cost-push shock.
Keywords: monetary policy; imperfect information; cost-push shock; high inflation (search for similar items in EconPapers)
JEL-codes: D83 E17 E31 E47 E52 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2025-07
New Economics Papers: this item is included in nep-dge and nep-mon
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https://crawford.anu.edu.au/sites/default/files/20 ... uss_Traficante_0.pdf (application/pdf)
Related works:
Working Paper: The Return of Inflation: Look-Through Policy Under Incomplete Information (2025) 
Working Paper: The Return of Inflation: Look-Through Policy Under Incomplete Information (2025) 
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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2025-40
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