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Research papers on Inflation and monetary policy

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  1. The Science of Monetary Policy: A New Keynesian Perspective

    Richard H. Clarida, Jordi Gaĺı, Mark Gertler · 1999 · Journal of Economic Literature · 4,995 citations

    The paper reviews the recent literature on monetary policy rules. We exposit the monetary policy design problem within a simple baseline theoretical framework. We then consider the implications of adding various real world complications. Among other things, we show that the optimal policy implicitly incorporates inflation targeting. We also characterize the gains from making a credible commitment to fight inflation. In contrast to conventional wisdom, we show that gains from commitment may emerge even if the central bank is not trying to inadvisedly push output above its natural level. We also consider the implications of frictions such as imperfect information.

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  3. Monetary Policy Rules Under Heterogeneous Inflation Expectations

    Sophocles N. Brissimis, Nicholas S. Magginas · 2017 · SSRN Electronic Journal · 1,695 citations

    This paper evaluates the role of inflation-forecast heterogeneity in US monetary policy making. The deviation between private and central bank inflation forecasts is identified as a factor increasing inflation persistence and thus calling for a policy reaction. An optimal policy rule is derived by the minimization under discretion of a standard central bank loss function subject to a Phillips curve, modified to include the forecast deviation, and a forward-looking aggregate demand equation. This rule, which itself includes the forecast deviation as an additional argument, is estimated for the period 1974-1998, covering the Chairmanships of Arthur Burns, Paul Volcker and Alan Greenspan, by us

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  4. Political and Monetary Institutions and Public Financial Policies in the Industrial Countries

    Vittorio Grilli, Donato Masciandaro, Guido Tabellini, et al. · 1991 · Economic Policy · 1,603 citations

    Institutions and policies Vittorio Grilli, Donato Masciandaro and Guido Tabellini Why do countries as similar as the industrialized OECD countries go through such different experience in terms of public deficits and debts or in terms of inflation? The answer cannot come from macroeconomic policy responses to different disturbances, nor from the principles of optimal taxation, but rather from politics. This article focuses on the role that particular institutions exert in providing constraints and incentives which shape the actions of policymakers. The electoral process and political traditions affect the ability of governments to deal with deficits and mounting debts. What seems to matter mo

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  5. Central Bank Strategy, Credibility, and Independence: Theory and Evidence

    Alex Cukierman · 1992 · RePEc: Research Papers in Economics · 1,395 citations

    Alex Cukierman is well known for his work on central bank behavior. This book brings together a large body of Cukierman's research and integrates it with recent developments in the political economy of monetary policy. Filled with applications and carefully worked out technical detail, it provides a valuable comprehensive analysis of central bank decisions, of the various effects of policy on inflation, and of the feedback from inflationary expectations to policy choices. Cukierman uncovers and analyzes the reasons for positive inflation and rates of monetary expansion. He shows that the money supply, and therefore inflation, are not exogenous. They are influenced by interactions involving d

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  6. Interest and prices : foundations of a theory of monetary policy

    Michael Woodford · 2003 · Project Muse (Johns Hopkins University) · 1,280 citations

    With the collapse of the Bretton Woods system, any pretense of a connection of the world's currencies to any real commodity has been abandoned. Yet since the 1980s, most central banks have abandoned money-growth targets as practical guidelines for monetary policy as well. How then can pure fiat currencies be managed so as to create confidence in the stability of national units of account? Interest and Prices seeks to provide theoretical foundations for a rule-based approach to monetary policy suitable for a world of instant communications and ever more efficient financial markets. In such a world, effective monetary policy requires that central banks construct a conscious and articulate acco

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  7. Inflation Targeting: A New Framework for Monetary Policy?

    Ben Bernanke, Frederic S. Mishkin · 1997 · The Journal of Economic Perspectives · 1,227 citations

    In recent years, a number of industrialized countries have adopted a strategy for monetary policy known as ‘inflation targeting.’ The authors describe how this approach has been implemented in practice and argue that it is best understood as a broad framework for policy, which allows the central bank ‘constrained discretion,’ rather than as an ironclad policy rule in the Friedman sense. They discuss the potential of the inflation-targeting approach for making monetary policy more coherent and transparent and for increasing monetary policy discipline. The authors' final section addresses some additional practical issues raised by this approach.

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  8. Should Central Banks Respond to Movements in Asset Prices?

    Ben Bernanke, Mark Gertler · 2001 · American Economic Review · 1,183 citations

    In recent decades, asset booms and busts have been important factors in macroeconomic fluctuations in both industrial and developing countries. In light of this experience, how, if at all, should central bankers respond to asset price volatility? We have addressed this issue in previous work (Bernanke and Gertler, 1999). The context of our earlier study was the relatively new, but increasingly popular, monetary-policy framework known as inflation-targeting (see e.g., Bernanke and Frederic Mishkin, 1997). In an inflation-targeting framework, publicly announced medium-term inflation targets provide a nominal anchor for monetary policy, while allowing the central bank some flexibility to help s

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  10. Monetary policy, inflation, and the business cycle : an introduction to the new Keynesian framework

    Jordi Gaĺı · 2008 · 921 citations

    The New Keynesian framework has emerged as the workhorse for the analysis of monetary policy and its implications for inflation, economic fluctuations, and welfare. It is the backbone of the new generation of medium-scale models under development at major central banks and international policy institutions, and provides the theoretical underpinnings of the inflation stability-oriented strategies adopted by most central banks throughout the industrialized world. This graduate-level textbook provides an introduction to the New Keynesian framework and its applications to monetary policy. Using a canonical version of the New Keynesian model as a reference framework, Jordi Gali explores issues

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  11. Inflation Forecasts and Monetary Policy

    Ben Bernanke, Michael Woodford · 1997 · Journal of money credit and banking · 436 citations

    Proposals for 'inflation targeting' as a strategy for monetary policy leave open the important operational question of how to determine whether current policies are consistent with the long-run inflation target. An interesting possibility is that the central bank might target current private-sector forecasts of inflation, either those made explicitly by professional forecasters or those implicit in asset prices. We address the issue of existence and uniqueness of rational expectations equilibria when the central bank uses private-sector forecasts as a guide to policy actions. In a dynamic model which incorporates both sluggish price adjustment and shocks to aggregate demand and aggregate sup

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  16. Inflation and economic growth: the search for a compromise for the Central Bank's monetary policy

    V. Mishchenko, S. Naumenkova, S. Mishchenko, et al. · 2018 · Banks and Bank Systems · 46 citations

    The article analyzes the influence of inflation on economic growth and substantiates the main directions of increasing the effectiveness of the central bank's anti-inflation policy. In order to determine the limit of inflation, the excess of which has a negative impact on the economic growth, the relationship is analyzed between the inflation rate and the real GDP growth rate on the basis of IMF statistics using the example of 158 countries. It was determined that in 2010–2017, in the global economy, the 6.0% inflation was the marginal value of the inflation rate, beyond which the economic growth rate declined or slowed down. Given the inverse relationship between the inflation rate and the

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  17. Inflation, oil price volatility and monetary policy

    Paúl Castillo, Carlos Montoro, Vicente Tuesta · 2020 · Journal of Macroeconomics · 41 citations

    In a fully micro-founded New Keynesian framework, we characterize analytically the relation between average inflation and oil price volatility by solving the rational expectations equilibrium of the model up to second order of accuracy. Higher oil price volatility induces higher levels of average inflation. We also show that when oil has low substitutability and the central bank responds to output fluctuations, oil price volatility matters for the level of average inflation. The model shows that when oil price volatility increases, average inflation increases whereas average output falls: this implies a trade-off also between average inflation and that of output. The analytical solution furt

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  18. Monetary policy & anchored expectations—An endogenous gain learning model

    Laura Gáti · 2023 · Journal of Monetary Economics · 37 citations

    This paper analyzes monetary policy in a model with a potential unanchoring of inflation expectations. The degree of unanchoring is given by how sensitively the public’s long-run inflation expectations respond to inflation surprises. I find that optimal policy moves the interest rate aggressively when expectations unanchor, allowing the central bank to accommodate inflation fluctuations when expectations are well-anchored. Furthermore, I estimate the model-implied relationship that determines the extent of unanchoring. The data suggest that the expectations process is nonlinear and asymmetric: expectations respond more sensitively to large or downside surprises than to smaller or upside ones

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  19. The Role of Central Bank Knowledge and Trust for the Public's Inflation Expectations

    Sathya Mellina, T. Schmidt · 2018 · SSRN Electronic Journal · 35 citations

    Since the financial crisis, central banks have stressed the role of trust and communication in connection with their objectives and strategies for aligning the public's inflation expectations with their own and, consequently, improving the effectiveness of monetary policy. Assessing how much the general public knows about and trust in central banks and how these factors influence inflation expectations is thus important. We shed light on these issues by relying on a representative survey conducted among individuals living in Germany. Although most respondents assume that they have a good or very good knowledge of the ECB and the Bundesbank, only about 20 percent cite "price stability" when a

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  20. Monetary Policy in Turkey after Central Bank Independence

    Refet S. GGrkaynak, Zeynep Kantur, M. Annl Taa, et al. · 2015 · SSRN Electronic Journal · 32 citations

    We present an accessible narrative of the Turkish economy since its great 2001 crisis. We broadly survey economic developments and pay particular attention to monetary policy. The data suggests that the Central Bank of Turkey was a strong inflation targeter early in this period but began to pay less attention to inflation after 2009. Loss of the strong nominal anchor is visible in the break we estimate in Taylor-type rules as well as in asset prices. We also argue that recent discrete jumps in Turkish asset prices, especially the exchange value of the lira, are due more to domestic factors. In the post-2009 period the Central Bank was able to stabilize expectations and asset prices when it c

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  21. Central Bank Credibility, Independence, and Monetary Policy

    Abdelkader Aguir · 2018 · Journal of Central Banking Theory and Practice · 30 citations

    Abstract The main motives behind the adoption of an inflation targeting regime largely relate to the notion of credibility, transparency of monetary policy and the autonomy of the central bank, which explicitly undertakes to achieve a certain inflation target. This paper examines the effects of inflation targeting in emerging economies in relation to the degree of independence of the central bank and the credibility of monetary policy. We find effects in emerging economies with little central bank independence, so our findings suggest that the central bank’s credibility, transparency and independence is a prerequisite for emerging economies to experience a decline in inflation following the

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  22. How transparent about its inflation target should a central bank be?

    I. Salle, Marc-Alexandre Sénégas, Murat Yıldızoğlu · 2019 · Journal of Evolutionary Economics · 30 citations

    Using an agent-based model, this paper revisits the merits for a central bank of announcing its inflation target. The model preserves the main transmission channels of monetary policy used in stochastic dynamic general equilibrium models– namely the consumption and the expectation channels, while allowing for agents’ heterogeneity in both expectations and behavior. We find that, in a rather stable environment such as the Great Moderation period, announcing the target allows for the emergence of a loop between credibility and success: if the target is credible, inflation expectations remain anchored at the target, which helps stabilize inflation, and, in turn, reinforces the central bank’s cr

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  23. Should a central bank react to food inflation? Evidence from an estimated model for Chile

    W. Ginn, Marc Pourroy · 2020 · Economic Modelling · 29 citations

    Abstract We examine whether food price shocks are a major source of macroeconomic fluctuations. We estimate a small open economy DSGE model using an alternative Taylor rule applied to Chilean data. The empirical evidence suggests that food inflation played a non-trivial role in shaping Chile's de facto monetary policy actions. Consistent with its commitment to price stability, the central bank increases the policy rate in reaction to food inflation. Despite an immediate monetary policy reaction to a food price shock, the policy rate gradually tapers off. This is due to a second-round effect on non-food inflation propagated by the food price shock. A main finding is that monetary policy that

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  24. Monetary policy, de-anchoring of inflation expectations, and the “new normal”

    Lucio Gobbi, Ronny Mazzocchi, R. Tamborini · 2019 · Journal of Macroeconomics · 29 citations

    Abstract Persistently low inflation rates, followed by declining inflation expectations, in advanced economies after the Great Recession have raised the question whether central banks are still able to credibly anchor inflation to their medium-term targets. The purpose of this paper is twofold. First, we investigate why agents’ expectations that over the business cycle inflation will remain in line with the target begin to falter. Our hypothesis is that agents form expectations in terms of their probabilistic belief that the economy may switch from a normal to a depression state (permanently low output and inflation), which is updated upon observing the actual state of the economy. Second, w

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