Positive Trend Inflation and Determinacy in a Medium-Sized New Keynesian Model

35 Pages Posted: 6 Jul 2018

See all articles by Jonas E Arias

Jonas E Arias

Board of Governors of the Federal Reserve System

Guido Ascari

University of Pavia

Nicola Branzoli

Bank of Italy

Efrem Castelnuovo

University of Melbourne - Department of Economics

Date Written: July 5, 2018

Abstract

This paper studies the challenge that increasing the inflation target poses to equilibrium determinacy in a medium-sized New Keynesian model without indexation fitted to the Great Moderation era. For moderate targets of the inflation rate, such as 2 or 4 percent, the probability of determinacy is near one conditional on the monetary policy rule of the estimated model. However, this probability drops significantly conditional on model-free estimates of the monetary policy rule based on real-time data. The difference is driven by the larger response of the federal funds rate to the output gap associated with the latter estimates.

Keywords: trend inflation, determinacy, monetary policy

JEL Classification: E52, E3, C22

Suggested Citation

Arias, Jonas E and Ascari, Guido and Branzoli, Nicola and Castelnuovo, Efrem, Positive Trend Inflation and Determinacy in a Medium-Sized New Keynesian Model (July 5, 2018). Melbourne Institute Working Paper No. 9/18. Available at SSRN: https://ssrn.com/abstract=3208551 or http://dx.doi.org/10.2139/ssrn.3208551

Jonas E Arias (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Guido Ascari

University of Pavia ( email )

27100 Pavia
Italy
+39 0382 506211 (Phone)
+39 304226 (Fax)

Nicola Branzoli

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Efrem Castelnuovo

University of Melbourne - Department of Economics ( email )

Melbourne, 3010
Australia

HOME PAGE: http://https://sites.google.com/site/efremcastelnuovo/home

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