How does a higher inflation target affect determinacy and learnability of rational expectations equilibria under alternative monetary/fiscal policy mixes in new Keynesian models? What is the role of central bank transparency? This article proves that in a non-Ricardian regime, determinacy and learnability conditions are insensitive to changes in trend inflation and to transparency issues: expectations stabilization requires taxes to react weakly to government debt. Conversely, a higher inflation target always destabilizes expectations under active monetary regimes. In a Ricardian regime, raising the inflation target requires a more hawkish central bank to attain determinacy. However, determinacy implies learnability only when agents are aware of both the inflation target and the central bank reaction function. If agents need to learn a positive inflation target, active monetary regimes are unstable. Therefore, fully disclosing the reaction function, including the target inflation rate, greatly increases the central bank’s effectiveness in stabilizing expectations.

Florio, A. P., Gobbi, A., Learning the monetary/fiscal interaction under trend inflation, <<OXFORD ECONOMIC PAPERS>>, 2015; (67(4)): 1146-1164 [http://hdl.handle.net/10807/79053]

Learning the monetary/fiscal interaction under trend inflation

Florio, Anna Paola
Primo
;
Gobbi, Alessandro
Secondo
2015

Abstract

How does a higher inflation target affect determinacy and learnability of rational expectations equilibria under alternative monetary/fiscal policy mixes in new Keynesian models? What is the role of central bank transparency? This article proves that in a non-Ricardian regime, determinacy and learnability conditions are insensitive to changes in trend inflation and to transparency issues: expectations stabilization requires taxes to react weakly to government debt. Conversely, a higher inflation target always destabilizes expectations under active monetary regimes. In a Ricardian regime, raising the inflation target requires a more hawkish central bank to attain determinacy. However, determinacy implies learnability only when agents are aware of both the inflation target and the central bank reaction function. If agents need to learn a positive inflation target, active monetary regimes are unstable. Therefore, fully disclosing the reaction function, including the target inflation rate, greatly increases the central bank’s effectiveness in stabilizing expectations.
Inglese
Florio, A. P., Gobbi, A., Learning the monetary/fiscal interaction under trend inflation, <<OXFORD ECONOMIC PAPERS>>, 2015; (67(4)): 1146-1164 [http://hdl.handle.net/10807/79053]
File in questo prodotto:
File Dimensione Formato  
04 - Learning the Monetary Fiscal Interaction under Trend Inflation.pdf

non disponibili

Tipologia file ?: Versione Editoriale (PDF)
Licenza: Non specificato
Dimensione 394.13 kB
Formato Unknown
394.13 kB Unknown   Visualizza/Apri

I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.

Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/10807/79053
Citazioni
  • ???jsp.display-item.citation.pmc??? ND
  • Scopus 3
  • ???jsp.display-item.citation.isi??? 3
social impact