Endogenous forecast switching near the zero lower bound

Lansing, Kevin J.

doi:10.1016/j.jmoneco.2019.12.003

Cited by 17 publications

(10 citation statements)

References 42 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…Bianchi, et al (2019) make a similar point. Lansing (2019b) considers a New Keynesian model with an occasionally binding ZLB and two local rational expectations equilibria, labeled the "targeted" and "de ‡ation" solutions respectively. The model can produce persistent in ‡ation undershooting if agents' forecast rules assign a nontrivial weight to the de ‡ation equilibrium.…”

Section: Related Literaturementioning

confidence: 99%

Anchored Inflation Expectations and the Slope of the Phillips Curve

Jørgensen¹,

Lansing

2022

ERWP

Self Cite

View full text Add to dashboard Cite

Conventional versions of the Phillips curve cannot account for in ‡ation dynamics during and after the U.S. Great Recession, leading many to conclude that the Phillips curve relationship has weakened or even disappeared. We show that if agents solve a signal extraction problem to disentangle temporary versus permanent shocks to in ‡ation, then agents'in ‡ation expectations should have become more "anchored"over the Great Moderation period. An estimated New Keynesian Phillips curve that accounts for the increased anchoring of expected in ‡ation exhibits a stable slope coe¢ cient over the period 1960 to 2019. Out-of-sample forecasts show that this model can account for the "missing disin ‡ation"during the U.S. Great Recession and the "missing in ‡ation"during the subsequent recovery. We use a simple three-equation New Keynesian model to show that an increase in the Taylor rule coe¢ cient on in ‡ation (or the output gap) serves to endogenously anchor agents'subjective in ‡ation expectations and thereby " ‡atten"the reduced-form Phillips curve.

show abstract

Section: Related Literaturementioning

confidence: 99%

Anchored Inflation Expectations and the Slope of the Phillips Curve

Jørgensen¹,

Lansing

2022

ERWP

Self Cite

View full text Add to dashboard Cite

show abstract

“…This means that the economy can follow many trajectories, and may include trajectories with potentially long-lasting ELB episodes that are driven by self-fulfilling declines in inflation expectations (Benhabib et al, 2001). Lansing (2019) shows that the effectiveness of monetary policy can be severely hampered when there is a risk of such self-fulfilling declines in expectations, while Holden (2019) demonstrates that a switch to PLT excludes such self-fulfilling equilibria at the ELB and produces a unique equilibrium. 153 In models with predominant rigidities in price-setting, the amplification of the volatility in economic activity may, however, be dampened by general equilibrium effects that tend to improve the stabilisation trade-off under PLT and AIT relative to IT; see, for instance, Vestin (2006).…”

Section: Chart 11mentioning

confidence: 99%

The Ecb's Price Stability Framework: Past Experience, and Current and Future Challenges

Cecion¹,

Coenen²,

Gerke³

et al. 2021

SSRN Journal

View full text Add to dashboard Cite

The ECB's price stability mandate has been defined by the Treaty. But the Treaty has not spelled out what price stability precisely means. To make the mandate operational, the Governing Council has provided a quantitative definition in 1998 and a clarification in 2003. The landscape has changed notably compared to the time the strategy review was originally designed. At the time, the main concern of the Governing Council was to anchor inflation at low levels in face of the inflationary history of the previous decades. Over the last decade economic conditions have changed dramatically: the persistent low-inflation environment has created the concrete risk of de-anchoring of longer-term inflation expectations. Addressing low inflation is different from addressing high inflation. The ability of the ECB (and central banks globally) to provide the necessary accommodation to maintain price stability has been tested by the lower bound on nominal interest rates in the context of the secular decline in the equilibrium real interest rate. Against this backdrop, this report analyses: the ECB's performance as measured against its formulation of price stability; whether it is possible to identify a preferred level of steady-state inflation on the basis of optimality considerations; advantages and disadvantages of formulating the objective in terms of a focal point or a range, or having both; whether the medium-term orientation of the ECB's policy can serve as a mechanism to cater for other considerations; how to strengthen, in the presence of the lower bound, the ECB's leverage on private-sector expectations for inflation and the ECB's future policy actions so that expectations can act as 'automatic stabilisers' and work alongside the central bank.

show abstract

“…We construct the Minimal State Variable (MSV) solution corresponding to the expectationstrap model. This concept is common to select among solutions in models with equilibrium indeterminacy (Aruoba et al, 2018;Lansing, 2019). The idea is to restrict inflation and output dynamics to functions of the vector of fundamental state variables.…”

Section: Why Sunspots?mentioning

confidence: 99%