scholarly journals STABILISATION POLICY, RATIONAL EXPECTATIONS AND PRICE-LEVEL VERSUS INFLATION TARGETING: A SURVEY

2014 ◽  
Vol 30 (2) ◽  
pp. 327-355 ◽  
Author(s):  
Michael Hatcher ◽  
Patrick Minford
Keyword(s):  
Rational Expectations ◽  
Inflation Targeting ◽  
Price Level ◽  
Stabilisation Policy ◽  
Level Versus

scholarly journals Coordinating expectations through central bank projections

2020 ◽  
Author(s):  
Fatemeh Mokhtarzadeh ◽  
Luba Petersen
Keyword(s):  
Central Bank ◽  
Rational Expectations ◽  
Inflation Targeting ◽  
Aggregate Stability ◽  
Central Banks ◽  
Output Gap ◽  
Forecast Errors ◽  
Market Participants ◽  
Wide Range ◽  
Ex Ante

AbstractCentral banks are increasingly communicating their economic outlook in an effort to manage the public and financial market participants’ expectations. We provide original causal evidence that the information communicated and the assumptions underlying a central bank’s projection can matter for expectation formation and aggregate stability. Using a between-subject design, we systematically vary the central bank’s projected forecasts in an experimental macroeconomy where subjects are incentivized to forecast the output gap and inflation. Without projections, subjects exhibit a wide range of heuristics, with the modal heuristic involving a significant backward-looking component. Ex-Ante Rational dual projections of the output gap and inflation significantly reduce the number of subjects’ using backward-looking heuristics and nudge expectations in the direction of the rational expectations equilibrium. Ex-Ante Rational interest rate projections are cognitively challenging to employ and have limited effects on the distribution of heuristics. Adaptive dual projections generate unintended inflation volatility by inducing boundedly-rational forecasters to employ the projection and model-consistent forecasters to utilize the projection as a proxy for aggregate expectations. All projections reduce output gap disagreement but increase inflation disagreement. Central bank credibility is significantly diminished when the central bank makes larger forecast errors when communicating a relatively more complex projection. Our findings suggest that inflation-targeting central banks should strategically ignore agents’ irrationalities when constructing their projections and communicate easy-to-process information.

What are the Right Models and Policies for a World of Low Inflation?

2006 ◽  
Vol 196 ◽  
pp. 92-106 ◽  
Author(s):  
Patrick Minford
Keyword(s):  
Monetary Policy ◽  
Inflation Targeting ◽  
Price Level ◽  
Nominal Rigidity ◽  
Long Run ◽  
Exchange Rate Overshooting ◽  
Target Path ◽  
The Right ◽  
High Degree ◽  
Value Of Money

Monetary policy should be guided by macroeconomic models with limited nominal rigidity; ‘New Classical’ or even for some issues just plain Classical (i.e. with no nominal rigidity at all) models are perfectly adequate for understanding various aspects of the economy that have previously led economists to believe in a high degree of nominal rigidity. On UK data these models account for the facts of inflation persistence and exchange rate ‘overshooting’; their impulse responses are in line with the data; and a typical example, the Liverpool Model, is marginally accepted in its entirety by the data since 1979. Such models suggest that no increased macro instability would result from taking the rigours of monetary policy one stage further from inflation targeting and ensuring that the price level itself is returned to its long-run preset target path — so that the value of money over long periods of time would be utterly predictable.

An Evaluation of Monetary Targeting Regimes

2000 ◽  
Vol 174 ◽  
pp. 105-113 ◽  
Author(s):  
Ray Barrell ◽  
Karen Dury
Keyword(s):  
Monetary Policy ◽  
Inflation Targeting ◽  
Price Level ◽  
Policy Framework ◽  
Policy Regime ◽  
Feedback Mechanisms ◽  
Policy Regimes ◽  
Monetary Targeting ◽  
Over Time ◽  
Monetary Policy Framework

The policy regime in Europe has put the economy on ‘auto-pilot’. We investigate different designs for the required feedback mechanisms. The uncertainty facing an economy depends on the pattern of shocks it faces, the response of the private sector to those shocks and also the policy reactions of the authorities. Two ‘ideal type’ policy regimes are investigated, and inflation targeting is compared to nominal aggregate targeting. In general it is suggested that targeting a nominal aggregate reduces the variability of the price level, and stabilises the price level more quickly over time. Inflation outcomes are also less variable for the Euro Area, and they are less asymmetric when a nominal aggregate is targeted. The new European fiscal framework requires that countries set deficit targets close to balance. We show that there is plenty of space for automatic stabilisers to work, but the room available depends in part on the monetary policy framework chosen.

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