Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/267907 
Authors: 
Year of Publication: 
2022
Series/Report no.: 
Discussion Paper No. 2022/9
Publisher: 
Freie Universität Berlin, School of Business & Economics, Berlin
Abstract: 
This paper analyzes the time-varying credibility of the Fed's inflation target in an empirical macro model with asymmetric information, where the public has to learn about the actual inflation target from the Fed's interest rate policy. To capture the evolving communication strategy of the Fed, I allow the learning rule and the structural shock variances to change across monetary policy regimes. I find that imperfect credibility is pronounced during the Volcker Disinflation and to a lesser extend in the aftermath of the 2008 Financial Crisis. The announcement of the 2% target in 2012 did not affect the learning rule strongly but reduced the variance of transitory monetary policy shocks. The results caution against equating long-term inflation expectations of professionals with the perceived inflation target.
Subjects: 
signal extraction problem
credibility
inflation target
unobserved components
VAR
JEL: 
C11
C32
D83
D82
E31
E52
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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