Macroeconomic Effects of Inflation Target Uncertainty Shocks

Marcelo Arbex, Sidney Caetano and Wilson Correa ()
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Wilson Correa: Department of Economics, Federal University of Juiz de Fora

No 1804, Working Papers from University of Windsor, Department of Economics

Abstract: This note studies the macroeconomic effects of uncertainty shocks on the inflation target (IT). The IT is assumed to change over time and its stochastic volatility is modeled as an autoregressive process. We show that an IT uncertainty shock, namely a shock on its volatility) resembles an aggregate demand shock, a robust qualitative result for different Taylor-type rules. The magnitude of real and nominal variables responses depend crucially on the Taylor rule considered: a more reactive rule implies a less severe recession and deflation, while an empirical plausible degree of interest rate smoothing leads output, unemployment, and inflation to react more strongly causing the recession to be more severe and deflationary.

Keywords: Uncertainty shocks; Infl ation target; Monetary policy. (search for similar items in EconPapers)
JEL-codes: E31 E32 E52 E58 (search for similar items in EconPapers)
Pages: 9 pages
Date: 2018-12
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-ore
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http://web2.uwindsor.ca/economics/RePEc/wis/pdf/1804.pdf First version, 2018 (application/pdf)

Related works:
Journal Article: Macroeconomic effects of inflation target uncertainty shocks (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:wis:wpaper:1804

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