Melecky, Martin and Rodrıguez Palenzuela, Diego and Soderstrom, Ulf (2008): Inflation Target Transparency and the Macroeconomy.
Download (276kB) | Preview
We quantify the effects of monetary policy transparency and credibility on macroeconomic volatility in an estimated model of the euro area economy. In our model, private agents are unable to distinguish between temporary shocks to the central bank’s monetary policy rule and persistent shifts in the inflation target, and therefore use optimal filtering techniques to construct estimates of the future monetary policy stance. We find that the macroeconomic benefits of credibly announcing the current level of the time-varying inflation target are reasonably small as long as private agents correctly understand the stochastic processes governing the inflation target and the temporary policy shock. If, on the other hand, private agents overestimate the volatility of the inflation target, the overall gains of announcing the target can be substantial. We also show that the central bank to some extent can help private agents in their learning process by responding more aggressively to deviations of inflation from the target.
|Item Type:||MPRA Paper|
|Original Title:||Inflation Target Transparency and the Macroeconomy|
|Keywords:||Credibility; Transparency; Inflation targeting; Imperfect information; Private sector learning|
|Subjects:||E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles
E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies
E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy
|Depositing User:||Martin Melecky|
|Date Deposited:||19. Sep 2008 10:26|
|Last Modified:||02. Mar 2013 04:41|
Altissimo, Filippo, Vasco Curdia, and Diego Rodrıguez Palenzuela (2005), “Linear-quadratic approximation to optimal policy: An algorithm and two applications,” Manuscript, European Central Bank.
Andolfatto, David, Scott Hendry, and Kevin Moran(2005), “Are inflation expectations rational?” Manuscript, Simon Fraser University.
Aoki, Kosuke and Takeshi Kimura (2007), “Uncertainty about perceived inflation target and monetary policy,” Manuscript, London School of Economics.
Beechey, Meredith (2004), “Excess sensitivity and volatility of long interest rates: The role of limited information in bond markets,” Working Paper No. 173, Sveriges Riksbank.
Beechey, Meredith and P¨ar ¨ Osterholm (2007), “The rise and fall of U.S. inflation persistence,” Finance and Economics Discussion Paper No. 2007-26, Board of Governors of the Federal Reserve System.
Benati, Luca (2006), “Investigating inflation persistence across monetary regimes,” Manuscript, European Central Bank.
Benigno, Pierpaolo and Michael Woodford (2003), “Optimal monetary and fiscal policy: A linear-quadratic approach,” in Mark Gertler and Kenneth Rogoff (eds.), NBER Macroeconomics Annual , The MIT Press.
Bernanke, Ben S., Thomas Laubach, Frederic S. Mishkin, and Adam S. Posen (1999), Inflation Targeting: Lessons from the International Experience, Princeton University Press.
Calvo, Guillermo A. (1983), “Staggered prices in a utility-maximizing framework,” Journal of Monetary Economics, 12 (3), 383–398.
Cateau, Gino (2005), “Monetary policy under model and data-parameter uncertainty,” Working Paper No. 2005-6, Bank of Canada. Forthcoming, Journal of Monetary Economics.
Cecchetti, Stephen G. and Michael Ehrmann (1999), “Does inflation targeting increase output volatility? An international comparison of policymakers’ preferences and outcomes,” Working Paper No. 7426, National Bureau of Economic Research.
Christiano, Lawrence J., Martin Eichenbaum, and Charles L. Evans (2005), “Nominal rigidities and the dynamic effects of a shock to monetary policy,” Journal of Political Economy, 113 (1), 1–45.
Clarida, Richard, Jordi Gal´ı, and Mark Gertler (1999), “The science of monetary policy: A New Keynesian perspective,” Journal of Economic Literature, 37 (4), 1661–1707.
Cogley, Timothy, Giorgio E. Primiceri, and Thomas J. Sargent (2007), “Inflation-gap persistence in the U.S.” Manuscript, Northwestern University.
Del Negro, Marco, Frank Schorfheide, Frank Smets, and Raf Wouters (2005), “On the fit and forecasting performance of New-Keynesian models,” Working Paper No. 491, European Central Bank.
Dennis, Richard (2006), “The policy preferences of the U.S. Federal Reserve,” Journal of Applied Econometrics, 21 (1), 55–77.
Ellingsen, Tore and Ulf Soderstrom (2001), “Monetary policy and market interest rates,” American Economic Review, 91 (5), 1594–1607.
Ellingsen, Tore and Ulf Soderstrom (2005), “Why are long rates sensitive to monetary policy?” Manuscript, IGIER, Bocconi University.
Erceg, Christopher J. and Andrew T. Levin (2003), “Imperfect credibility and inflation persistence,” Journal of Monetary Economics, 50 (4), 915–944.
Gaspar, Vıtor, Frank Smets, and David Vestin (2005), “Optimal monetary policy under adaptive learning,” Manuscript, European Central Bank.
Gaspar, Vıtor, Frank Smets, and David Vestin (2006a), “Adaptive learning, persistence, and optimal monetary policy,” Working Paper No. 644, European Central Bank.
Gaspar, Vıtor, Frank Smets, and David Vestin (2006b), “Monetary policy over time,” Macroeconomic Dynamics, 10 (2), 207–229.
Gurkaynak, Refet S., Andrew T. Levin, Andrew N. Marder, and Eric T. Swanson (2007),“Inflation targeting and the anchoring of inflation expectations in the western hemisphere,” in Frederic S. Mishkin and Klaus Schmidt-Hebbel (eds.), Monetary Policy under Inflation Targeting, Central Bank of Chile.
Gurkaynak, Refet S., Andrew T. Levin, and Eric T. Swanson (2006), “Does inflation targeting anchor long-run inflation expectations? Evidence from long-term bond yields in the U.S., U.K., and Sweden,” Working Paper No. 2006-09, Federal Reserve Bank of San Francisco.
Gurkaynak, Refet S., Brian Sack, and Eric Swanson (2005), “The sensitivity of long-term interest rates to economic news: Evidence and implications for macroeconomic models,” American Economic Review, 95 (1), 425–436.
Hamilton, James D. (1994), Time Series Analysis, Princeton University Press.
Ireland, Peter N. (2007), “Changes in the Federal Reserve’s inflation target,” Manuscript, Boston College.
Kozicki, Sharon and P.A. Tinsley (2005), “Permanent and transitory policy shocks in an empirical macro model with asymmetric information,” Journal of Economic Dynamics and Control , 29 (11), 1985–2015.
Leiderman, Leonardo and Lars E.O. Svensson (1995), Inflation Targets, Centre for Economic Policy Research.
Levin, Andrew T., Fabio M. Natalucci, and Jeremy M. Piger (2004), “The macroeconomic effects of inflation targeting,” Federal Reserve Bank of St. Louis Review, 86 (4), 51–80.
Levin, Andrew T., Alexei Onatski, John C. Williams, and Noah Williams (2005), “Monetary policy under uncertainty in micro-founded macroeconometric models,” in Mark Gertler and Kenneth Rogoff (eds.), NBER Macroeconomics Annual, The MIT Press.
McCallum, Bennett T. (1997), “Comment (on ‘An optimization-based econometric framework for the evaluation of monetary policy’ by Julio J. Rotemberg and Michael Woodford),” in Ben S. Bernanke and Julio J. Rotemberg (eds.), NBER Macroeconomics Annual, The MIT Press.
Molnar, Krisztina and Sergio Santoro (2006), “Optimal monetary policy when agents are learning,” Manuscript, Norwegian School of Economics and Business Administration.
Moran, Kevin (2005), “Learning and the welfare implications of changing inflation targets,” Working Paper No. 05-11, CIRP´EE, Universite Laval.
Nunes, Ricardo C. (2005), “Learning the inflation target,” Manuscript, Universitat Pompeu Fabra.
Onatski, Alexei and Noah Williams (2004), “Empirical and policy performance of a forwardlooking monetary model,” Manuscript, Princeton University.
Orphanides, Athanasios and John C. Williams (2007), “Inflation targeting with imperfect knowledge,” Federal Reserve Bank of San Francisco Economic Review, 1–23.
Rudebusch, Glenn D. (2001), “Is the Fed too timid? Monetary policy in an uncertain world,” Review of Economics and Statistics, 83 (2), 203–217.
Rudebusch, Glenn D. (2002), “Term structure evidence on interest rate smoothing and monetary policy inertia,” Journal of Monetary Economics, 49 (6), 1161–1187.
Rudebusch, Glenn D. and John C. Williams (2006), “Revealing the secrets of the temple: The value of publishing central bank interest rate projections,” Working Paper No. 2006-31, Federal Reserve Bank of San Francisco. Forthcoming in Campbell, John Y. (ed.), Asset Prices and Monetary Policy, The University of Chicago Press.
Smets, Frank and Raf Wouters (2003), “An estimated dynamic stochastic general equilibrium model of the Euro area,” Journal of the European Economic Association, 1 (5), 1123–1175.
Smets, Frank and Raf Wouters (2005), “Comparing shocks and frictions in U.S. and Euro area business cycles: A Bayesian DSGE approach,” Journal of Applied Econometrics, 20 (2), 161–183.
Smets, Frank and Raf Wouters (2007), “Shocks and frictions in U.S. business cycles: A Bayesian DSGE approach,” American Economic Review, 97 (3), 586–606.
Svensson, Lars E. O. and Michael Woodford (2004), “Implementing optimal policy through inflation-forecast targeting,” in Ben S. Bernanke and Michael Woodford (eds.), The Inflation-Targeting Debate, The University of Chicago Press.
Tinsley, Peter A. (1999), “Short rate expectations, term premiums, and central bank use of derivatives to reduce policy uncertainty,” Finance and Economics Discussion Paper No. 99-14, Board of Governors of the Federal Reserve System.
Woodford, Michael (2003), Interest and Prices: Foundations of a Theory of Monetary Policy, Princeton University Press.