Permanent and transitory policy shocks in an empirical macro model with asymmetric information

Sharon Kozicki and Peter Tinsley

No 2003/41, CFS Working Paper Series from Center for Financial Studies (CFS)

Abstract: Despite a large literature documenting that the efficacy of monetary policy depends on how inflation expectations are anchored, many monetary policy models assume: (1) the inflation target of monetary policy is constant; and, (2) the inflation target is known by all economic agents. This paper proposes an empirical specification with two policy shocks: permanent changes to the inflation target and transitory perturbations of the short-term real rate. The public sector cannot correctly distinguish between these two shocks and, under incomplete learning, private perceptions of the inflation target will not equal the true target. The paper shows how imperfect policy credibility can affect economic responses to structural shocks, including transition to a new inflation target - a question that cannot be addressed by many commonly used empirical and theoretical models. In contrast to models where all monetary policy actions are transient, the proposed specification implies that sizable movements in historical bond yields and inflation are attributable to perceptions of permanent shocks in target inflation.

Keywords: transmission mechanism; learning; policy credibility; time-varying natural rate; shifting endpoint; inflation target; term structure of interest rates (search for similar items in EconPapers)
JEL-codes: D82 D83 E43 E52 (search for similar items in EconPapers)
Date: 2003
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (20)

Downloads: (external link)
https://www.econstor.eu/bitstream/10419/25429/1/515125458.PDF (application/pdf)

Related works:
Journal Article: Permanent and transitory policy shocks in an empirical macro model with asymmetric information (2005)
Journal Article: Permanent and transitory policy shocks in an empirical macro model with asymmetric information (2004)
Working Paper: Permanent and Transitory Policy Shocks in an Empirical Macro Model with Asymmetric Information (2004)
Working Paper: Permanent and transitory policy shocks in an empirical macro model with asymmetric information (2003)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:zbw:cfswop:200341

Access Statistics for this paper

More papers in CFS Working Paper Series from Center for Financial Studies (CFS) Contact information at EDIRC.
Bibliographic data for series maintained by ZBW - Leibniz Information Centre for Economics ().