Sustainable Monetary Policy and Inflation Expectations

31 Pages Posted: 10 Jun 2010

See all articles by Roc Armenter

Roc Armenter

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Date Written: June 2, 2010

Abstract

The author shows that the short-term nominal interest rate can anchor private-sector expectations into low inflation more precisely, into the best equilibrium reputation can sustain. He introduces nominal asset markets in an infinite horizon version of the Barro-Gordon model. The author then analyzes the subset of sustainable policies compatible with any given asset price system at date t=0. While there are usually many sustainable inflation paths associated with a given set of asset prices, the best sustainable inflation path is implemented if and only if the short-term nominal bond is priced at a certain discount rate. His results suggest that policy frameworks must also be evaluated on their ability to coordinate expectations.

Suggested Citation

Armenter, Roc, Sustainable Monetary Policy and Inflation Expectations (June 2, 2010). FRB of Philadelphia Working Paper No. 10-20. Available at SSRN: https://ssrn.com/abstract=1622829 or http://dx.doi.org/10.2139/ssrn.1622829

Roc Armenter (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

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