The Flattening of the Phillips Curve and the Learning Problem of the Central Bank

Jean-Paul L'Huillier and William Zame

No 1503, EIEF Working Papers Series from Einaudi Institute for Economics and Finance (EIEF)

Abstract: We illustrate an intuitive channel through which price stickiness limits the ability of a central bank to improve welfare through stabilization policy. If the central bank uses infl ation to obtain information about nominal spending, sticky prices impair the learning ability of the central bank and hence its ability to implement the right stabilization policy. Infl ation targeting makes prices stickier, and worsens this learning problem. The key is a microfounded information-based model for price stickiness: taking into account how agents react to the adoption of infl ation targeting makes explicit a basic confl ict between in flation targeting and stabilization policy.

Pages: 44 pages
Date: 2015, Revised 2014-10
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eie:wpaper:1503

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