Monetary policy and inflationary shocks under imperfect credibility

Matthieu Darracq Paries and Stéphane Moyen

Economics Letters, 2012, vol. 116, issue 3, 571-574

Abstract: In this note, we quantify the deterioration of achievable stabilization outcomes when monetary policy operates under imperfect credibility and weak anchoring of long-term expectations. Within a medium-scale Dynamic Stochastic General Equilibrium (DSGE) model, we introduce, through a simple signal extraction problem, an imperfect knowledge configuration in which price and wage setters wrongly have doubts about the determination of the central bank to maintain a fixed 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. We find that the costs of maintaining a given inflation volatility under weak credibility could amount to 0.25 percentage point (pp) of output gap standard deviation.

Keywords: Monetary policy; Imperfect credibility; Signal extraction (search for similar items in EconPapers)
JEL-codes: E4 E5 F4 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (2)

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Working Paper: Monetary policy and inflationary shocks under imperfect credibility (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:116:y:2012:i:3:p:571-574

DOI: 10.1016/j.econlet.2012.05.052

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