Author : Matthias Neuenkirch
Publisher :
ISBN 13 :
Total Pages : pages
Book Rating : 4.:/5 (839 download)
Book Synopsis Inflation Targeting, Credibility and Non-linear Taylor Rules by : Matthias Neuenkirch
Download or read book Inflation Targeting, Credibility and Non-linear Taylor Rules written by Matthias Neuenkirch and published by . This book was released on 2012 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: In this paper we systematically evaluate how central banks respond to inflation deviations from target. We present a stylized New Keynesian model in which agents' inflation expectations are sensitive to inflation deviations from target. To (re- )establish credibility, optimal monetary policy under discretion is shown to set higher interest rates today if average inflation exceeded the target in the past. Moreover, policy responds non-linearly to past inflation gaps. This is reflected in an additional term in the central bank's optimal instrument rule, which we refer to as the "credibility loss". Augmenting a standard Taylor (1993) rule with the latter term, we provide empirical evidence for the interest rate response for a sample of nine IT or quasi-IT economies. We find that past deviations from the inflation target are feeding back into the reaction function of seven central banks and that this influence is economically meaningful. A deteroriation in credibility forces central bankers to undertake larger interest rate steps (ceteris paribus). -- Inflation expectations ; credibility ; reaction function ; Taylor rule