Discretionary Monetary Policy and Inflation Persistence

Niklas Westelius

No 424, Economics Working Paper Archive at Hunter College from Hunter College Department of Economics

Abstract: Rational expectations models of staggered price/wage contracts have failed to replicate the observed persistence in inflation and unemployment during disinflation periods. The current literature on this persistency puzzle has focused on augmenting the nominal contract model with imperfect credibility and learning. In this paper, I re-examine the persistency puzzle by focusing on the discretionary nature of monetary policy. I show that when the central bank is allowed to re-optimize a quadratic loss function each period, imperfect credibility and learning, even in the absence of staggered contracts, can generate a significant amount of inflation persistence and employment losses during a disinflationary period.

Keywords: Monetary policy; Disinflation; Credibility; Inflation persistence (search for similar items in EconPapers)
JEL-codes: E31 E52 (search for similar items in EconPapers)
Date: 2005
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Citations: View citations in EconPapers (28)

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Persistent link: https://EconPapers.repec.org/RePEc:htr:hcecon:424

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