scholarly journals Inflation-Gap Persistence in the US

2010 ◽  
Vol 2 (1) ◽  
pp. 43-69 ◽  
Author(s):  
Timothy Cogley ◽  
Giorgio E. Primiceri ◽  
Thomas J. Sargent
Keyword(s):  
Stochastic Volatility ◽  
New Keynesian ◽  
New Keynesian Model ◽  
Vector Autoregressions ◽  
Medium Term ◽  
Inflation Target ◽  
Keynesian Model ◽  
Trend Inflation ◽  
The Us ◽  
The Difference

We estimate vector autoregressions with drifting coefficients and stochastic volatility to investigate whether US inflation persistence has changed. We focus on the inflation gap, defined as the difference between inflation and trend inflation, and we measure persistence in terms of short- to medium-term predictability. We present evidence that inflation-gap persistence increased during the Great Inflation and that it fell after the Volcker disinflation. We interpret these changes using a dynamic new Keynesian model that highlights the importance of changes in the central bank's inflation target. (JEL E12, E31, E52, E58)

scholarly journals Ambiguity, Monetary Policy, and Trend Inflation

2020 ◽  
Author(s):  
Riccardo M Masolo ◽  
Francesca Monti
Keyword(s):  
Monetary Policy ◽  
New Keynesian ◽  
Inflation Expectations ◽  
New Keynesian Model ◽  
Inflation Target ◽  
Keynesian Model ◽  
Long Run ◽  
Trend Inflation ◽  
The Us ◽  
Blue Chip

ABSTRACT Allowing for ambiguity about the behavior of the policymaker in a simple New-Keynesian model gives rise to wedges between long-run inflation expectations, trend inflation, and the inflation target. The degree of ambiguity we measure in Blue Chip survey data helps explain the dynamics of long-run inflation expectations and the inflation trend measured in the US data. Ambiguity also has implications for monetary policy. We show that it is optimal for policymakers to lean against the households’ pessimistic expectations, but also document the limits to the extent the adverse effects of ambiguity can be undone.

scholarly journals Public Debt and Changing Inflation Targets

2016 ◽  
Vol 8 (4) ◽  
pp. 142-176 ◽  
Author(s):  
Michael U. Krause ◽  
Stéphane Moyen
Keyword(s):  
Central Bank ◽  
Public Debt ◽  
Pronounced Effect ◽  
New Keynesian ◽  
Moderate Increase ◽  
New Keynesian Model ◽  
Inflation Target ◽  
Keynesian Model ◽  
Maturity Structure ◽  
Inflation Targets

What are the effects of a higher central bank inflation target on the burden of real public debt? Several recent proposals have suggested that even a moderate increase in the inflation target can have a pronounced effect on real public debt. We consider this question in a New Keynesian model with a maturity structure of public debt and an imperfectly observed inflation target. We find that moderate changes in the inflation target only have significant effects on real public debt if they are essentially permanent. Moreover, the additional benefits of not communicating a change in the inflation target are minor. (JEL E12, E31, E52, H63)

scholarly journals Walk on the Wild Side: Temporarily Unstable Paths and Multiplicative Sunspots

2019 ◽  
Vol 109 (5) ◽  
pp. 1805-1842 ◽  
Author(s):  
Guido Ascari ◽  
Paolo Bonomolo ◽  
Hedibert F. Lopes
Keyword(s):  
Stochastic Volatility ◽  
Rational Expectations ◽  
New Keynesian ◽  
New Keynesian Model ◽  
Inflation Dynamics ◽  
Generalized Model ◽  
Keynesian Model

We propose a generalization of the rational expectations framework to allow for temporarily unstable paths. Our approach introduces multiplicative sunspot shocks and it yields drifting parameters and stochastic volatility. Then, we provide an econometric strategy to estimate this generalized model on the data. The methodology allows the data to choose between different possible alternatives: determinacy, indeterminacy, and temporary instability. We apply our methodology to US inflation dynamics in the 1970s through the lens of a simple New Keynesian model. When temporarily unstable paths are allowed, the data unambiguously select them to explain the stagflation period in the 1970s. (JEL D84, E12, E31, E32, E52)

scholarly journals The effect of central bank credibility on forward guidance in an estimated New Keynesian model

2021 ◽  
pp. 1-39
Author(s):  
Stephen J. Cole ◽  
Enrique Martínez-García
Keyword(s):  
Central Bank ◽  
Rational Expectations ◽  
New Keynesian ◽  
New Keynesian Model ◽  
Survey Of Professional Forecasters ◽  
Forward Guidance ◽  
Keynesian Model ◽  
The Us ◽  
Imperfect Credibility ◽  
Central Bank Credibility

Abstract This paper examines the effectiveness of forward guidance shocks in the US. We estimate a New Keynesian model with imperfect central bank credibility and heterogeneous expectations using Bayesian methods and survey data from the Survey of Professional Forecasters (SPF). The results provide important takeaways: (1) The estimated credibility of the Fed’s forward guidance announcements is relatively high, but anticipation effects are attenuated. Accordingly, output and inflation do not respond as favorably as in the fully credible counterfactual. (2) The so-called “forward guidance puzzle” arises partly from the unrealistically large responses of macroeconomic variables to forward guidance under perfect credibility and homogeneous fully informed rational expectations, assumptions which are found to be jointly inconsistent with the observed US data. (3) Imperfect credibility provides a plausible explanation for the empirical evidence of forecasting error predictability based on forecasting disagreement found in the SPF data. Thus, we show that accounting for imperfect credibility and forecasting disagreements is important to understand the formation of expectations and the transmission mechanism of forward guidance.

UNANCHORED EXPECTATIONS: SELF-REINFORCING LIQUIDITY TRAPS AND MULTIPLE STEADY STATES

2019 ◽  
pp. 1-29 ◽  
Author(s):  
Joep Lustenhouwer
Keyword(s):  
Steady State ◽  
Discrete Choice ◽  
Steady States ◽  
New Keynesian ◽  
Multiple Steady States ◽  
New Keynesian Model ◽  
Expectation Values ◽  
Inflation Target ◽  
Liquidity Trap ◽  
Keynesian Model

We study a New Keynesian model with bounded rationality, where agents choose their expectations heterogeneously from a discrete choice set. The range of their set of possible expectation values can be interpreted as the anchoring of expectations. In the model, multiple locally stable steady states can arise that reflect coordination on particular expectation values. Moreover, bad shocks to the economy can trigger a self-reinforcing wave of pessimism, where the zero lower bound on the nominal interest rate becomes binding, and agents coordinate on a locally stable liquidity trap steady state. When we let the anchoring of expectations evolve endogenously, it turns out that the anchoring of expectations at the time the bad shocks hit the economy is crucial in determining whether the economy can recover from the liquidity trap. Finally, we find that a higher inflation target makes it less likely that self-reinforcing liquidity traps arise.

scholarly journals Positive Trend Inflation and Determinacy in a Medium-Sized New Keynesian Model

2018 ◽  
Author(s):  
Jonas E Arias ◽  
Guido Ascari ◽  
Nicola Branzoli ◽  
Efrem Castelnuovo
Keyword(s):  
New Keynesian ◽  
Positive Trend ◽  
New Keynesian Model ◽  
Keynesian Model ◽  
Trend Inflation

Trend inflation and monetary policy rules: determinacy analysis in New Keynesian model with capital accumulation

2015 ◽  
Vol 15 (1) ◽  
Author(s):  
Elena Gerko ◽  
Kirill Sossounov
Keyword(s):  
Capital Accumulation ◽  
New Keynesian ◽  
Positive Trend ◽  
Price Setting ◽  
New Keynesian Model ◽  
Time Analysis ◽  
Interest Rate Policy ◽  
Keynesian Model ◽  
Trend Inflation ◽  
Rate Policy

AbstractThe paper analyzes the effect of positive trend inflation in the framework of a standard New Keynesian model with Calvo price setting and capital accumulation. We are building on the work of Carlstrom and Fuerst (Carlstrom, Charles T., and Timothy S. Fuerst. 2005. “Investment and Interest Rate Policy: A Discrete-Time Analysis.”

LEARNING THE INFLATION TARGET

2009 ◽  
Vol 13 (2) ◽  
pp. 167-188 ◽  
Author(s):  
Ricardo Nunes
Keyword(s):  
Rational Expectations ◽  
Solution Method ◽  
Phillips Curve ◽  
New Keynesian ◽  
New Keynesian Model ◽  
Inflation Target ◽  
Rule Of Thumb ◽  
Keynesian Model

We propose a framework in which expectations have a rational and a learning component. We describe a solution method for these frameworks and provide an application to the Volcker disinflation with the New Keynesian model. Although the model with rational expectations does not seem to account for this episode, results improve when a small and empirically plausible proportion of private agents are learning. The learning component is argued to be more robust and plausible than the rule-of-thumb expectations present in the hybrid Phillips curve.

scholarly journals Fiscal Volatility Shocks and Economic Activity

2015 ◽  
Vol 105 (11) ◽  
pp. 3352-3384 ◽  
Author(s):  
Jesús Fernández-Villaverde ◽  
Pablo Guerrón-Quintana ◽  
Keith Kuester ◽  
Juan Rubio-Ramírez
Keyword(s):  
Adverse Effect ◽  
Economic Activity ◽  
The United States ◽  
New Keynesian ◽  
Time Varying ◽  
New Keynesian Model ◽  
Us Economy ◽  
Keynesian Model ◽  
The Us ◽  
Previous Step

We study how unexpected changes in uncertainty about fiscal policy affect economic activity. First, we estimate tax and spending processes for the United States with time-varying volatility to uncover evidence of time-varying volatility. Second, we estimate a VAR for the US economy using the time-varying volatility found in the previous step. Third, we feed the tax and spending processes into an otherwise standard New Keynesian model. Both in the VAR and in the model, we find that unexpected changes in fiscal volatility shocks can have a sizable adverse effect on economic activity. An endogenous increase in markups is a key mechanism. (JEL E12, E23, E32, E52, E62)

scholarly journals Positive Trend Inflation and Determinacy in a Medium-Sized New Keynesian Model

2018 ◽  
Author(s):  
Jonas E Arias ◽  
Guido Ascari ◽  
Nicola Branzoli ◽  
Efrem Castelnuovo
Keyword(s):  
New Keynesian ◽  
Positive Trend ◽  
New Keynesian Model ◽  
Keynesian Model ◽  
Trend Inflation
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