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Economics

Inflation persistence

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Full-Text Articles in Social and Behavioral Sciences

Discretionary Policy And Multiple Equilibria In A New Keynesian Model, Volker Hahn Mar 2017

Discretionary Policy And Multiple Equilibria In A New Keynesian Model, Volker Hahn

Volker Hahn

We show that discretionary policy-making can lead to multiple rational-expectations equilibria where the central bank responds to inflation sentiments, which are not directly related to economic fundamentals. Some equilibria have favorable consequences for welfare, resulting in outcomes superior even to those achieved under timeless-perspective commitment. Moreover, we show that our framework can explain several moments of US data reasonably well. In particular, it provides an alternative explanation for the high degree of inflation persistence found in the data.

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Learning Dynamics In Monetary Policy: The Robustness Of An Aggressive Price Stabilizing Policy, Miao Wang, M. C. Sunny Wong Mar 2005

Learning Dynamics In Monetary Policy: The Robustness Of An Aggressive Price Stabilizing Policy, Miao Wang, M. C. Sunny Wong

Economics Faculty Research and Publications

This paper investigates the effect of an aggressive inflation stabilizing monetary policy on the ability of agents to reach a rational expectations equilibrium for inflation and output. Using an adaptive learning framework, we develop a model that combines a real wage contracting rigidity with an interest rate rule. We show that an AR(1) equilibrium requires more aggressive monetary policy to achieve both determinacy and learnability. This model and policy findings contrast with Bullard and Mitra’s [Determinacy, learnability and monetary policy inertia (2001); Journal of Monetary Economics 49 (2002) 1105] model (no inflation persistence) and policy findings (less aggressive policy). These …

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