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The signaling effect of raising inflation
- Source :
- Journal of Economic Theory. 178:488-516
- Publication Year :
- 2018
- Publisher :
- Elsevier BV, 2018.
-
Abstract
- This paper argues that central bankers should raise inflation to signal their credibility to forward guidance policies. As inflation can be stabilized in normal times either because of central banker's credibility (e.g. because of reputation concerns) or because of his aversion to inflation, the private sector is unable to infer the central banker's type from observing stable inflation before a liquidity trap, jeopardizing the efficiency of forward guidance policy. We derive optimal policy in a new-Keynesian model subject to liquidity traps where agents are uncertain about the central banker's type and we show that the credible central banker can signal his type by raising inflation before a trap. We show that this signaling motive can justify level of inflation well above 2% but also that the low inflation volatility during the Great Moderation was insufficient to ensure fully efficient forward guidance when needed.
- Subjects :
- Inflation
Economics and Econometrics
media_common.quotation_subject
Monetary economics
Forward guidance
JEL: E - Macroeconomics and Monetary Economics/E.E3 - Prices, Business Fluctuations, and Cycles/E.E3.E31 - Price Level • Inflation • Deflation
JEL: E - Macroeconomics and Monetary Economics/E.E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit/E.E5.E52 - Monetary Policy
JEL: E - Macroeconomics and Monetary Economics/E.E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook/E.E6.E65 - Studies of Particular Policy Episodes
Liquidity trap
0502 economics and business
Credibility
Economics
Real interest rate
050207 economics
050205 econometrics
media_common
Great Moderation
05 social sciences
Forward Guidance
Private sector
Signaling
Market liquidity
8. Economic growth
[SHS.GESTION]Humanities and Social Sciences/Business administration
Volatility (finance)
Reputation
Subjects
Details
- ISSN :
- 00220531
- Volume :
- 178
- Database :
- OpenAIRE
- Journal :
- Journal of Economic Theory
- Accession number :
- edsair.doi.dedup.....b51d42dae234e369e3a17473b1f117d4