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A NOTE ON THE ANCHORING EFFECT OF EXPLICIT INFLATION TARGETS

Published online by Cambridge University Press:  19 October 2009

Jan Libich
Jan Libich*
Affiliation:
La Trobe University and CAMA
*
Address correspondence to: Jan Libich, La Trobe University, School of Economics and Finance, Melbourne, Victoria, 3086, Australia; e-mail: j.libich@latrobe.edu.au.
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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.

Keywords

Anchoring EffectRational InattentionEndogenous TimingExplicit Inflation Targets
Type
Notes
Information
Macroeconomic Dynamics , Volume 13 , Issue 5 , November 2009 , pp. 685 - 697
Copyright
Copyright © Cambridge University Press 2009

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References

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