Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/269092 
Authors: 
Year of Publication: 
2022
Series/Report no.: 
ECB Working Paper No. 2685
Publisher: 
European Central Bank (ECB), Frankfurt a. M.
Abstract: 
This paper analyzes monetary policy in a model with a potential unanchoring of inflation expectations. The degree of unanchoring is given by how sensitively the public's long-run inflation expectations respond to inflation surprises. I find that optimal policy moves the interest rate aggressively when expectations unanchor, allowing the central bank to accommodate inflation fluctuations when expectations are well-anchored. Furthermore, I estimate the model-implied relationship that determines the extent of unanchoring. The data suggest that the expectations process is nonlinear and asymmetric: expectations respond more sensitively to large or downside surprises than to smaller or upside ones.
Subjects: 
anchored expectations
behavioral macro
optimal monetary policy
JEL: 
E52
E71
D84
Persistent Identifier of the first edition: 
ISBN: 
978-92-899-5269-9
Document Type: 
Working Paper

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