Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/25429
Authors: 
Kozicki, Sharon
Tinsley, P. A.
Year of Publication: 
2003
Series/Report no.: 
CFS Working Paper 2003/41
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.
Subjects: 
transmission mechanism
learning
policy credibility
time-varying natural rate
shifting endpoint
inflation target
term structure of interest rates
JEL: 
E43
E52
D82
D83
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

Files in This Item:
File
Size





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.