Conquering Credibility for Monetary Policy under Sticky Confidence

Jaylson Silveira () and Gilberto Lima

No 2012_09, Working Papers, Department of Economics from University of São Paulo (FEA-USP)

Abstract: We derive a best-reply monetary policy when the confidence by price setters on the monetary authority’s commitment to price level targeting may be both incomplete and sticky. We find that complete confidence (or full credibility) is not a necessary condition for the achievement of a price level target even when heterogeneity in firms’ price level expectations is endogenously time-varying and may emerge as a long-run equilibrium outcome. In fact, in the absence of exogenous perturbations to the dynamic of confidence building, it is the achievement of a price level target for long enough that, due to stickiness in the state of confidence, rather ensures the conquering of full credibility. This result has relevant implications for the conduct of monetary policy in pursuit of price stability. One implication is that setting a price level target matters more as a means to provide monetary policy with a sharper focus on price stability than as a device to conquer credibility. As regards the conquering of credibility for monetary policy, it turns out that actions speak louder than words, as the continuing achievement of price stability is what ultimately performs better as a confidence-building device.

Keywords: Price level targeting; best-reply monetary policy; evolutionary dynamics; sticky confidence. (search for similar items in EconPapers)
JEL-codes: C73 E31 E52 (search for similar items in EconPapers)
Date: 2012-06-26, Revised 2015-06-22
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Related works:
Working Paper: CONQUERING CREDIBILITY FOR MONETARY POLICY UNDER STICKY CONFIDENCE (2016)
Journal Article: Conquering Credibility for Monetary Policy under Sticky Confidence (2015)
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