Inflation Targeting, Recursive Inattentiveness, and Heterogeneous Beliefs

Anna Agliari, Nicolo' Pecora, Domenico Massaro, Alessandro Spelta

Research output: Contribution to journalArticlepeer-review

7 Citations (Scopus)

Abstract

We consider a monetary authority that provides an explicit inflation target in order to align expectations with the policy objective. However, biased perceptions of the target may arise due to imperfect information flows. We allow agents to revise expectations over time and we model their recursive choice among prediction strategies as an optimization problem under rational inattention. We then investigate whether a simple policy rule can steer the economy toward the targeted equilibrium. Our findings suggest that determinacy under rational expectations may not be sufficient to reach the target. Instead, monetary policy should be fine-tuned to correct agents' biased beliefs.
Original languageEnglish
Pages (from-to)1587-1619
Number of pages33
JournalJOURNAL OF MONEY, CREDIT, AND BANKING
Volume49
DOIs
Publication statusPublished - 2017

Keywords

  • heterogeneous expectations
  • inflation targeting
  • monetary policy
  • new Keynesian model
  • recursive inattentiveness

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