Ambiguity, Monetary Policy and Trend Inflation

50 Pages Posted: 24 Nov 2015

Date Written: November 13, 2015

Abstract

We develop a model that can explain the evolution of trend inflation in the United States in the three decades before the Great Recession as a function of the reduction in uncertainty about the monetary policy maker’s behaviour. The model features ambiguity-averse agents and ambiguity regarding the conduct of monetary policy, but is otherwise standard. Trend inflation arises endogenously and has these determinants: the strength with which the central bank responds to inflation, the degree of uncertainty about monetary policy perceived by the private sector, and, if it exists, the inflation target. Given the importance of monetary policy for the determination of trend inflation, we also study optimal monetary policy in the case of lingering ambiguity.

Keywords: Ambiguity aversion, monetary policy, trend inflation

JEL Classification: D84, E31, E43, E52, E58

Suggested Citation

Masolo, Riccardo and Monti, Francesca, Ambiguity, Monetary Policy and Trend Inflation (November 13, 2015). Bank of England Working Paper No. 565, Available at SSRN: https://ssrn.com/abstract=2694495 or http://dx.doi.org/10.2139/ssrn.2694495

Riccardo Masolo (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Francesca Monti

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
33
Abstract Views
560
PlumX Metrics