Monetary policy & anchored expectations: An endogenous gain learning model

Arbeitspapier

This paper analyzes monetary policy in a model with a potential unanchoring of inflation expectations. The degree of unanchoring is given by how sensitively the public's long-run inflation expectations respond to inflation surprises. I find that optimal policy moves the interest rate aggressively when expectations unanchor, allowing the central bank to accommodate inflation fluctuations when expectations are well-anchored. Furthermore, I estimate the model-implied relationship that determines the extent of unanchoring. The data suggest that the expectations process is nonlinear and asymmetric: expectations respond more sensitively to large or downside surprises than to smaller or upside ones.

Object Details

• ISBN: 978-92-899-5269-9
• Language: Englisch

References and Relationships

• Bibliographic citation: Series: ECB Working Paper ; No. 2685

Classification and Topics

• Classification: Wirtschaft ; Monetary Policy ; Macro-Based Behavioral Economics: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on the Macro Economy‡ ; Expectations; Speculations
• Subject: anchored expectations ; behavioral macro ; optimal monetary policy

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Gáti, Laura
• Event: Veröffentlichung
• (who): European Central Bank (ECB)
• (where): Frankfurt a. M.
• (when): 2022

Further information

• DOI: doi:10.2866/360586
• Handle: http://hdl.handle.net/10419/269092
• Last update: 10.03.2025, 11:44 AM CET