Inflation Target Shocks and Monetary Policy Inertia in the Euro Area

Fève, Patrick; Matheron, Julien; Sahuc, Jean‐Guillaume

doi:10.2139/ssrn.1630401

Cited by 5 publications

(4 citation statements)

References 68 publications

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“…8 8 This approach has been used by Ozlale (2003), Söderström et al (2005), and Castelnuovo (2006). Studies that estimate the inflation target directly include Favero and Rovelli (2003), Dennis (2004, 2006)Ireland (2007), and Fève, Matheron, and Sahuc (2010). …”

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confidence: 99%

Estimating Central Bank Preferences under Commitment and Discretion

Givens¹

2012

J of Money Credit Banking

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This paper explains US macroeconomic outcomes with an empirical new-Keynesian model in which monetary policy minimizes the central bank's loss function. The presence of expectations in the model forms a well-known distinction between two modes of optimization, termed commitment and discretion. I estimate the model separately under each policy using maximum likelihood over the Volcker-Greenspan-Bernanke period. Comparisons of fit reveal that the data favor the specification with discretionary policy. Estimates of the loss function weights point to an excessive concern for interest rate smoothing in the commitment model but a more balanced concern relative to inflation and output stability in the discretionary model.

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confidence: 99%

Estimating Central Bank Preferences under Commitment and Discretion

Givens¹

2012

J of Money Credit Banking

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“…The trend inflation rate then remains at this level until the end of our sample. Indeed, similarly note that there has been a decline in trend inflation in the euro area, just as suggests.…”

Section: Robustnessmentioning

confidence: 71%

European Inflation and the New Keynesian Phillips Curve

Mazumder

2012

Southern Economic Journal

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The majority of macroeconomists who have studied inflation dynamics in Europe argue that the New Keynesian Phillips Curve (NKPC) provides a good way to describe changes in the price level from the 1970 on. However the vast majority of these articles estimate the NKPC using the labor income share as the proxy for real marginal cost. This article argues that the labor share cannot serve as a proxy for real marginal cost because of its countercyclicality and the lack of labor adjustment costs. Once we account for labor adjustment costs, we are able to derive a new marginal cost proxy that is indeed procyclical; however, we find that the NKPC fails to produce coefficients consistent with its underlying structural parameters when a procyclical marginal cost proxy is used. This casts serious doubt whether the NKPC is empirically applicable to Europe or, for that matter, any other country.

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“…A non-exhaustive list of studies along this dimension includes Smets and Wouters (2003), Ireland (2007), Cogley et al (2010), F eve et al (2010), Del Negro and Eusepi (2011), Del Negro et al (2015, Bhattarai et al (2016), and Lie (2017, 2018). The first literature concern the incorporation of time-varying inflation targets into DSGE models, in both their estimated and calibrated variants.…”

Section: Related Literature and Contributionmentioning

confidence: 99%

“…This specification follows that in Smets and Wouters (2003), Adolfson et al (2007), Cogley et al (2010), Copaciu et al (2015), Del Negro et al (2015, Bhattarai et al (2016), and Eo and Lie (2018), which assume a stationary, but highly persistent process. An alternative specification is to assume a pure random walk process for the inflation target, as in Ireland (2007) andF eve et al (2010), for example. An alternative specification is to assume a pure random walk process for the inflation target, as in Ireland (2007) andF eve et al (2010), for example.…”

Section: Monetary-policy Rule and The Evolution Of Inflation Targetmentioning

confidence: 99%

Observed Inflation‐target Adjustments in an Estimated DSGE Model for Indonesia: Do They Matter for Aggregate Fluctuations?

Lie

2019

J of App Econs and Policy

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This paper investigates the role of observed official inflation-target adjustments in aggregate macroeconomic fluctuations in Indonesia, using an estimated Dynamic Stochastic General Equilibrium model. The paper finds that these adjustments or shocks play a non-trivial role in the fluctuations of inflation and nominal interest rate in Indonesia. Output fluctuations, however, are virtually unaffected. A counterfactual exercise shows that a faster disinflation policy, through an immediate decrease in Bank Indonesia's inflation target, may have resulted in a lower average inflation and nominal interest rate, with virtually no output loss. The paper also provides additional insights on the contribution of various shocks in driving aggregate fluctuations in Indonesia. Technology and monetary-policy shocks are found to be the main driving factor for both output and inflation fluctuations. Movements in the nominal interest rate are mostly driven by preference and riskpremium shocks, with inflation-target shocks playing a larger role in the longer run.Keywords: inflation target, inflation-target adjustments or shocks, DSGE model for Indonesia, source of aggregate fluctuations, Bank Indonesia. *Thanks to Yunjong Eo for valuable discussions and suggestions. Comments and suggestions from an anonymous referee are gratefully acknowledged. All errors are mine. The online appendix of the paper can be found at Since 2005, the official targets are set by the government, in close coordination with and with input from Bank Indonesia, through a Minister of Finance's decree. The targets are established for three year periods and are usually announced in advancefor example, the targets for 2013, 2014, and 2015 were set and announced in the second quarter of 2012 through Decree No. 66/PMK.011/2012. Each announced target is a mid-point target, with AE1 per cent tolerance band. Ó 2019 The Economic Society of Australia 2019 INFLATION TARGET ADJUSTMENTS DSGE INDONESIA 2 Copaciu et al. (2015) develop and estimate a large-scale DSGE model for the Romanian economy. In the paper, actual inflation-target data are used as one of the observables. 3An earlier version of this paper considers another extension of the standard model involving a money-holding friction due to a cash-in-advance (CIA) constraint. This additional friction is motivated by the fact that Indonesia is still largely a cash-oriented society (records from BI show that in 2015 almost 90 per cent of all transactions in Indonesia are cash transactions). While the inclusion of this friction improves the marginal likelihood of the model and the estimated CIA parameter is economically and statistically significant, the baseline results and their interpretation are largely the same, with or without this friction.

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Inflation Target Shocks and Monetary Policy Inertia in the Euro Area

Cited by 5 publications

References 68 publications

Estimating Central Bank Preferences under Commitment and Discretion

Estimating Central Bank Preferences under Commitment and Discretion

European Inflation and the New Keynesian Phillips Curve

Observed Inflation‐target Adjustments in an Estimated DSGE Model for Indonesia: Do They Matter for Aggregate Fluctuations?

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