Sustainable monetary policy and inflation expectations

Roc Armenter (roc.armenter@phil.frb.org)

No 10-20, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: The author shows that the short-term nominal interest rate can anchor private-sector expectations into low inflation more precisely, into the best equilibrium reputation can sustain. He introduces nominal asset markets in an infinite horizon version of the Barro-Gordon model. The author then analyzes the subset of sustainable policies compatible with any given asset price system at date t = 0. While there are usually many sustainable inflation paths associated with a given set of asset prices, the best sustainable inflation path is implemented if and only if the short-term nominal bond is priced at a certain discount rate. His results suggest that policy frameworks must also be evaluated on their ability to coordinate expectations.

Keywords: Inflation (Finance); Interest rates; Asset pricing (search for similar items in EconPapers)
Date: 2010
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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