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- Title
A NOTE ON THE ANCHORING EFFECT OF EXPLICIT INFLATION TARGETS.
- Authors
Libich, Jan
- Abstract
Empirical literature provided convincing evidence that explicit (i.e., legislated) inflation targets anchor expectations. I propose a novel game theoretic framework with generalized timing that allows us to formally capture this beneficial anchoring effect. Using the framework I identify several factors that influence whether and how strongly expectations are anchored, namely (i) the public's cost of decision making, (ii) the public's inflation aversion, (iii) the slope of the Phillips curve, (iv) the magnitude of supply shocks, (v) the degree of central bank conservatism, and under many (but not all) circumstances, (vi) the explicitness of the inflation target.
- Subjects
PRICE inflation; EFFECT of inflation on the banking industry; ECONOMIC forecasting; RATIONAL expectations (Economic theory); ANCHORING effect; DECISION making; PHILLIPS curve; CENTRAL banking industry
- Publication
Macroeconomic Dynamics, 2009, Vol 13, Issue 5, p685
- ISSN
1365-1005
- Publication type
Article
- DOI
10.1017/S1365100509080328