The signaling effect of raising inflation

Eric Mengus and Jean Barthélemy

No 1190, 2016 Meeting Papers from Society for Economic Dynamics

Abstract: This paper argues that central bankers can raise inflation to signal their ability to commit to forward guidance policies. As inflation can be stabilized in normal times either because of central banker’s commitment ability or because of his aversion to inflation, the private sector is unable to infer the central banker’s type from observing stable inflation before a liquidity trap, jeopardizing the efficiency of forward guidance policy. We derive optimal policy in a new-Keynesian model subject to liquidity traps where agents are uncertain about the central banker’s type and we show that the central banker with commitment ability can signal its type by raising inflation before a trap. The corresponding level of signaling inflation increases with the frequency, the severity as well as with the length of liquidity traps. Finally, we show that this signaling motive can explain level of inflation well above 2%.

Date: 2016
New Economics Papers: this item is included in nep-dge, nep-mac and nep-mon
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Related works:
Journal Article: The signaling effect of raising inflation (2018)
Working Paper: The Signaling Effect of Raising Inflation (2017)
Working Paper: The Signaling Effect of Raising Inflation (2016)
Working Paper: The Signaling Effect of Raising Inflation (2016)
Working Paper: The Signaling Effect of Raising Inflation (2016)
Working Paper: The Signaling Effect of Raising Inflation (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed016:1190

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