Year: 2007
Type: preprint
Abstract: We analyse the interaction between private agents? uncertainty about inflation target and the central bank's data uncertainty. In our model, private agents update their perceived inflation target and the central bank estimates unobservable economic shocks as well as the perceived inflation target. Under those two uncertainties, the learning process of both private agents and the central bank causes higher order beliefs to become relevant, and this mechanism is capable of generating high persistence and volatility of inflation even though the underlying shocks are purely transitory. We also find that the persistence and volatility become smaller as the inflation target becomes more credible, that is, the private agents' uncertainty about inflation target (and hence the bank's data uncertainty) diminishes.
DOI: 10.2139/ssrn.2785293
Authors: Kosuke Aoki, Takeshi Kimura
Institutions: The University of Tokyo, Bank of Japan
Language: English
Domain: Social Sciences
Open Access status: green
Funder: Deutsche Bundesbank
OpenAlex ID: W2102619331