Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/319996 
Year of Publication: 
2017
Series/Report no.: 
CASMEF Working Paper Series No. WP 2017/05
Publisher: 
LUISS Guido Carli, Department of Economics and Finance, Arcelli Centre for Monetary and Financial Studies, Rome
Abstract: 
In a standard new Keynesian framework we derive the conditions under which increasing the inflation target does not deliver expectational instability. We consider two monetary policy regimes with respect to information about the inflation target. Under transparency, there is full disclosure of the inflation target, while, under opacity, the private sector uses optimal Kalman filter to disentangle persistent and transitory increases in the inflation target. Interestingly, the analytical condition that guarantees asymptotical E-stability under transparency is the same that we obtain for a variety of calibrations under opacity. On the other hand, under transparency the transition to the long-run equilibrium is faster and the variance of inflation is lower. Our results are consistent with the view that increasing the inflation target can be used as a policy instrument without unanchoring expectations.
Subjects: 
Kalman filter
Adaptive Learning
Policy Targets
JEL: 
E52
E62
F41
F42
Document Type: 
Working Paper

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