Learning the Inflation Target

34 Pages Posted: 28 Apr 2005

See all articles by Ricardo Cavaco Nunes

Ricardo Cavaco Nunes

Federal Reserve Banks - Federal Reserve Bank of Boston

Date Written: September 2004

Abstract

The New Keynesian model with rational expectations unrealistically predicts that unanticipated credible changes in the inflation target lead to an immediate jump in the inflation level while the output gap is unaffected. We set up a theoretical model where agents learn the behaviour of the economy. In this context, a permanent change in the inflation target leads inflation to respond sluggishly while the output gap is temporarily affected. We extend the model to allow for both learners and forward looking agents to coexist. The calibrated model explains quite well transition dynamics during the Volker disinflation.

Keywords: Learning, Policy shifts, Volker disinflation

JEL Classification: D83, E31, E52

Suggested Citation

Nunes, Ricardo Cavaco, Learning the Inflation Target (September 2004). Available at SSRN: https://ssrn.com/abstract=710404 or http://dx.doi.org/10.2139/ssrn.710404

Ricardo Cavaco Nunes (Contact Author)

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

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