Hostname: page-component-586b7cd67f-rdxmf Total loading time: 0 Render date: 2024-11-26T07:24:05.508Z Has data issue: false hasContentIssue false
  • English
  • Français

A NOTE ON THE ANCHORING EFFECT OF EXPLICIT INFLATION TARGETS

Published online by Cambridge University Press:  19 October 2009

Jan Libich
Jan Libich*
Affiliation:
La Trobe University and CAMA
*
Address correspondence to: Jan Libich, La Trobe University, School of Economics and Finance, Melbourne, Victoria, 3086, Australia; e-mail: [email protected].
Get access Rights & Permissions [Opens in a new window]

Abstract

Empirical literature provided convincing evidence that explicit (i.e., legislated) inflation targets anchor expectations. I propose a novel game theoretic framework with generalized timing that allows us to formally capture this beneficial anchoring effect. Using the framework I identify several factors that influence whether and how strongly expectations are anchored, namely (i) the public's cost of decision making, (ii) the public's inflation aversion, (iii) the slope of the Phillips curve, (iv) the magnitude of supply shocks, (v) the degree of central bank conservatism, and under many (but not all) circumstances, (vi) the explicitness of the inflation target.

Keywords

Anchoring EffectRational InattentionEndogenous TimingExplicit Inflation Targets
Type
Notes
Information
Macroeconomic Dynamics , Volume 13 , Issue 5 , November 2009 , pp. 685 - 697
Copyright
Copyright © Cambridge University Press 2009

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Beechey, Meredith J., Johannsen, Benjamin K., and Levin, Andrew T. (2008) Are Long-Run Inflation Expectations Anchored More Firmly in the Euro Area Than in the United States? Federal Reserve Board, DP 2008-23.CrossRefGoogle Scholar
Bernanke, Ben S. (2007) Inflation Expectations and Inflation Forecasting. Monetary Economics Workshop, NBER Summer Institute, Cambridge, MA.Google Scholar
Cho, I. and Matsui, A. (2005) Time consistency in alternating move policy games. Japanese Economic Review 56 (3)273–294.CrossRefGoogle Scholar
Clarida, Richard, Gali, Jordi, and Gertler, Mark (1998) Monetary policy rules in practice: Some international evidence. European Economic Review 42, 1033–1067.CrossRefGoogle Scholar
Clarida, Richard, Gali, Jordi, and Gertler, Mark (1999) The science of monetary policy: A New Keynesian perspective. Journal of Economic Literature 37, 1661–1707.CrossRefGoogle Scholar
Gürkaynak, Refet S., Levin, Andrew T., and Swanson, Eric T. (2006) Does Inflation Targeting Anchor Long-Run Inflation Expectations? Evidence from Long-Term Bond Yields in the US, UK, and Sweden. Federal Reserve Bank of San Francisco Working paper 2006-09.Google Scholar
Gürkaynak, Refet S., Sack, Brian, and Swanson, Eric T. (2005) The sensitivity of long-term interest rates to economic news: Evidence and implications for macroeconomic models. American Economic Review 95, 425–436.CrossRefGoogle Scholar
Kohn, Donald L. (2008) Lessons for Central Bankers from a Phillips Curve Framework. Federal Reserve Bank of Boston's 53rd Annual Economic Conference, Chatham, MA.CrossRefGoogle Scholar
Kuttner, K.N. and Posen, A.S. (1999) Does Talk Matter After All? Inflation Targeting and Central Bank Behavior. Staff Reports 88, Federal Reserve Bank of New York.Google Scholar
Levin, Andrew T., Natalucci, Fabio M., and Piger, Jeremy M. (2004) The macroeconomic effects of inflation targeting. Federal Reserve Bank of St. Louis Review 86, 51–80.Google Scholar
Libich, Jan (2009) Inflation Nutters? Modeling the Flexibility of Inflation Targeting. Mimeo, La Trobe University.Google Scholar
Mankiw, N. Gregory and Reis, Ricardo (2002) Sticky information versus sticky prices: A proposal to replace the New Keynesian Phillips curve. Quarterly Journal of Economics 117, 1295–1328.CrossRefGoogle Scholar
Mishkin, Frederic S. (2007) Inflation Dynamics. Annual Macro Conference, Federal Reserve Board of San Francisco, CA.Google Scholar
Reis, Ricardo (2006) Inattentive consumers. Journal of Monetary Economics 53 (8), 1761–1800.CrossRefGoogle Scholar