A NOTE ON EXPECTATIONAL STABILITY UNDER NONZERO TREND INFLATION

Teruyoshi Kobayashi · Ichiro Muto

31 citations0/0 files storedMacroeconomic Dynamics

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Monetary Policy and Economic Impact Economic Theory and Policy Economic theories and models

Abstract

This study examines the expectational stability of rational expectations equilibria (REE) under alternative Taylor rules when trend inflation is nonzero. We find that when trend inflation is high, the REE is likely to be expectationally unstable. This result holds true regardless of the nature of the data (such as contemporaneous, forecast, or lagged data) introduced in the Taylor rule. Our results suggest that high macroeconomic volatility during the period of high trend inflation can be explained well by introducing the concept of expectational stability.

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References

2001Learning and Expectations in Macroeconomics 2010Rethinking Macroeconomic Policy 2002Learning about monetary policy rules 2008Trend Inflation, Indexation, and Inflation Persistence in the New Keynesian Phillips Curve 2011Which Dimensions of Culture Matter for Long-Run Growth?1997Issues in the Design of Monetary Policy Rules 2009Trend Inflation, Taylor Principle, and Indeterminacy 2011Monetary Policy, Trend Inflation, and the Great Moderation: An Alternative Interpretation

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