Learning the monetary/fiscal interaction under trend inflation

Anna Paola Florio, Alessandro Gobbi, Anna Florio

Risultato della ricerca: Contributo in rivistaArticolo in rivista

3 Citazioni (Scopus)

Abstract

How does a higher inflation target affect determinacy and learnability of rational expectations equilibria under alternative monetary/fiscal policy mixes in new Keynesian models? What is the role of central bank transparency? This article proves that in a non-Ricardian regime, determinacy and learnability conditions are insensitive to changes in trend inflation and to transparency issues: expectations stabilization requires taxes to react weakly to government debt. Conversely, a higher inflation target always destabilizes expectations under active monetary regimes. In a Ricardian regime, raising the inflation target requires a more hawkish central bank to attain determinacy. However, determinacy implies learnability only when agents are aware of both the inflation target and the central bank reaction function. If agents need to learn a positive inflation target, active monetary regimes are unstable. Therefore, fully disclosing the reaction function, including the target inflation rate, greatly increases the central bank’s effectiveness in stabilizing expectations.
Lingua originaleEnglish
pagine (da-a)1146-1164
Numero di pagine19
RivistaOxford Economic Papers
Stato di pubblicazionePubblicato - 2015

Keywords

  • Learning
  • Monetary and fiscal policy

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