Deflationary vs. Inflationary Expectations - A New-Keynesian Perspective with Heterogeneous Agents and Monetary Believes

Felix Geiger and Oliver Sauter

No 312/2009, Diskussionspapiere aus dem Institut für Volkswirtschaftslehre der Universität Hohenheim from Department of Economics, University of Hohenheim, Germany

Abstract: We expand a standard New-Keynesian model by allowing for a special role of money in the inflation and expectations building process. Motivated by the two-pillar Phillips curve, we introduce heterogeneous expectations. Thereby a fraction of agents forms inflation expectations by observing trend money growth. We show that in the presence of these monetary believers, contractive shocks to the economy produce smoother dynamics for inflation and output. We also find that monetary policy should follow a conventional Taylor rule with contemporaneous inflation and output data, if it is uncertain about the fraction of monetary believers.

Keywords: New-Keynesian model; monetary policy; two-pillar Phillips curve; heterogeneous expectations; monetary believes (search for similar items in EconPapers)
JEL-codes: E31 E41 E47 E52 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2009-06
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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