Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/153499
Authors: 
Darracq Pariès, Matthieu
Moyen, Stéphane
Year of Publication: 
2009
Series/Report no.: 
ECB Working Paper 1065
Abstract: 
This paper quantifies the deterioration of achievable tabilization outcomes when monetary policy operates under imperfect credibility and weak anchoring of long-term expectations. Within a medium-scale DSGE model, we introduce through a simple signal extraction problem, an imperfect knowledge configuration where rice and wage setters wrongly doubt about the determination of the central bank to leave unchanged its long-term inflation objective in the face of inflationary shocks. The magnitude of private sector learning has been calibrated to match the volatility of US inflation expectations at long horizons. Given such illustrative calibrations, we find that the costs of aintaining a given inflation volatility under weak credibility could amount to 0.25 pp of output gap standard deviation.
Subjects: 
Imperfect credibility
monetary policy
Signal extraction
JEL: 
E4
E5
F4
Document Type: 
Working Paper

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