Inflation-Targeting Monetary Regime in an Environment of Heterogeneous Expectations of Inflation

Jaylson Silveira () and Gilberto Lima

No 2012_11, Working Papers, Department of Economics from University of São Paulo (FEA-USP)

Abstract: We study the dynamics of an inflation targeting regime in a macroeconomic context represented by a three-equation model (IS curve, Phillips curve and interest rate rule) and with heterogeneous strategies to form expectations of inflation. Economic agents choose between using the official inflation target as predictor of future inflation (credulous strategy) or paying a random cost (unknown a priori) to perfectly predict it (skeptical strategy). The distribution of these strategies in the population follows an evolutionary dynamics with and without endogenous mutation. We find that full credibility is not a necessary condition for reaching the inflation target, given that heterogeneity of inflation expectations, when there is mutation, is an evolutionary equilibrium but the inflation target is nonetheless reached.

Keywords: inflation target; inflation expectation; evolutionary dynamics (search for similar items in EconPapers)
JEL-codes: C73 E31 E52 (search for similar items in EconPapers)
Date: 2012-08-07
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