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Transparency, expectations anchoring and inflation target

European Economic Review, ISSN: 0014-2921, Vol: 91, Page: 261-273
2017
  • 20
    Citations
  • 0
    Usage
  • 24
    Captures
  • 1
    Mentions
  • 0
    Social Media
Metric Options:   Counts1 Year3 Year

Metrics Details

  • Citations
    20
    • Citation Indexes
      10
    • Policy Citations
      10
      • Policy Citation
        10
  • Captures
    24
  • Mentions
    1
    • Blog Mentions
      1
      • Blog
        1

Article Description

In various speeches, former Fed Chairman Ben Bernanke contrasted the proposal of setting a higher inflation target by claiming that it could unanchor inflation expectations. A standard New Keynesian framework with learning supports this claim both asymptotically, because a higher inflation target shrinks the E-stability region when a central bank follows a Taylor rule, and in the transition phase, because a higher inflation target slows down the speed of convergence of expectations. Transparency helps anchoring expectations. However, the importance of being transparent diminishes with the level of the inflation target. Finally, the higher the inflation target, the more policy should respond to inflation and the less to output to guarantee E-stability. Hence, a policy that increases both the inflation target and the monetary policy response to output would be “reckless”.

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