Monetary Shocks and Inflation Dynamics in the New Keynesian Model

Abstract

This paper demonstrates that imperfect information and gradual learning is a plausible and promising mechanism for generating realistic inflation and output dynamics in the standard new Keynesian model.

Inferring monetary policy objectives with a partially observed state

“…Ehrmann and Smets (2003) and Cukierman and Lippi (2005) derive optimal policy under conditions where natural output is unknown and find that agents make systematic output gap prediction errors. Dellas (2006) and Collard and Dellas (2010) show that mismeasurement of the state helps produce an inertial response of inflation to monetary shocks. Collard et al (2009) estimate a DSGE model with the same information structure.…”

Asset pricing in the production economy subject to monetary shocks

“…In particular, Cooley and Hansen (1995) and Dellas (2006) use volatility of the monetary shock parameter = 0.008.…”

“…18 Technology shock persistence varies from a purely transitive shock ( = 0) to a permanent shock ( = 1). Monetary policy variables are set in accordance with Cooley and Hansen (1995) and Dellas (2006). Monetary shock shock persistence is set to = 0.491, volatility of the monetary shock = 0.0089.…”

“…19 Cooley and Hansen run the autoregression for M1 growth rate over a sample period 1954:Q1 to 1991:Q2 and provide an estimate for . Dellas (2006) sets = 0.008. Challe and Giannitsarou (2010) set this parameter equal to zero.…”

The Signal Extraction Problem Revisited: A Note on Its Impact on a Model of Monetary Policy

“…Despite the presence of imperfect information, inflation peaks either immediately after a monetary policy shock or within one period. Using a New Keynesian model, Dellas (2006) shows that a temporary monetary policy shock generates a modest lag in the peak inflation response when variables such as output, inflation, investment, and employment are mismeasured. Both Amano et al (1999) and Dellas (2006) designate the money supply as the monetary authority's policy instrument.…”