How Should Central Banks Respond to Non-neutral Inflation Expectations?

Imran Hussain Shah and Ian Corrick

No 64/17, Department of Economics Working Papers from University of Bath, Department of Economics

Abstract: This paper attempts to investigate the real net effects of inflation and the consequences for monetary policy in Argentina, Iran and Venezuela, which are the three countries that have experienced the highest inflationary episodes in the last three decades. The Net Inflation Effect on Output (NIEO) is evaluated by taking the difference between expected and output-neutral inflation, which are computed from VAR estimates. For all three countries it is found that for episodes of high inflation, NIEO is significantly and increasingly positive, which implies that, during these periods, inflationary expectations exceeded output-neutral inflation, generating positive real output effects. It is also found that the monetary policy actions taken in these three countries could potentially have been better-timed to minimize the undesirable output fluctuations that followed the policies, by timing interest rate changes to coincide with a smaller magnitude of NIEO.

Date: 2016
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Journal Article: How should Central Banks Respond to Non-neutral Inflation Expectations? (2018)
Working Paper: How Should Central Banks Respond to Non-neutral Inflation Expectations (2016)
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