We consider a monetary authority that provides an explicit inflation target in order to align expectations with the policy objective. However, biased perceptions of the target may arise due to imperfect information flows. We allow agents to revise expectations over time and we model their recursive choice among prediction strategies as an optimization problem under rational inattention. We then investigate whether a simple policy rule can steer the economy toward the targeted equilibrium. Our findings suggest that determinacy under rational expectations may not be sufficient to reach the target. Instead, monetary policy should be fine-tuned to correct agents' biased beliefs.

Inflation targeting, recursive inattentiveness, and heterogeneous beliefs / A. Agliari, D. Massaro, N. Pecora, A. Spelta. - In: JOURNAL OF MONEY, CREDIT, AND BANKING. - ISSN 0022-2879. - 49:7(2017 Oct), pp. 1587-1619. [10.1111/jmcb.12425]

Inflation targeting, recursive inattentiveness, and heterogeneous beliefs

D. Massaro;
2017

Abstract

We consider a monetary authority that provides an explicit inflation target in order to align expectations with the policy objective. However, biased perceptions of the target may arise due to imperfect information flows. We allow agents to revise expectations over time and we model their recursive choice among prediction strategies as an optimization problem under rational inattention. We then investigate whether a simple policy rule can steer the economy toward the targeted equilibrium. Our findings suggest that determinacy under rational expectations may not be sufficient to reach the target. Instead, monetary policy should be fine-tuned to correct agents' biased beliefs.
heterogeneous expectations; inflation targeting; monetary policy; new Keynesian model; recursive inattentiveness
Settore SECS-P/01 - Economia Politica
Settore SECS-P/02 - Politica Economica
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/2434/820804
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