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Ambiguity, monetary policy and trend inflation

Riccardo M. Masolo and Francesca Monti ()

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: Allowing for ambiguity, or Knightian uncertainty, about the behavior of the policymaker helps explain the evolution of trend inflation in the US in a simple new-Keynesian model, without resorting to exogenous changes in the inflation target. Using Blue Chip survey data to gauge the degree of private sector confidence, our model helps reconcile the difference between target inflation and the inflation trend measured in the data. We also show how, in the presence of ambiguity, it is optimal for policymakers to lean against the private sectors pessimistic expectations.

Keywords: Ambiguity aversion; monetary policy; trend inflation (search for similar items in EconPapers)
JEL-codes: D84 E31 E43 E52 E58 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
Date: 2017-02-06
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http://eprints.lse.ac.uk/86165/ Open access version. (application/pdf)

Related works:
Working Paper: Ambiguity, Monetary Policy and Trend Inflation (2017) Downloads
Working Paper: Ambiguity, Monetary Policy and Trend Inflation (2017) Downloads
Working Paper: Ambiguity, monetary policy and trend inflation (2015) Downloads
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