Permanent and Transitory Policy Shocks in an Empirical Macro Model with Asymmetric Information



The estimated actual and perceived target series exhibit considerable time variation
and the difference between the two series can be sizable. In Figure 1, the estimates of
the target and perceived target are predictions conditional on data through the previous
period, but given estimates of model parameters based on the full sample. Movements in
the estimated target reflect the direct contribution of permanent policy shocks to inflation
variability. Thus, the figure suggests that permanent policy shocks that led to shifts in the
implicit inflation target contributed importantly to fluctuations in the perceived target and
inflation. This is a different view than Orphanides and Williams (2003) who assume that
all variation in perceived target shifts is due to learning behavior. The sizable differences
between movements in the actual target and the perceived target provide evidence that
imperfect credibility associated with learning is also an important factor explaining time
variation in the perceived target and inflation. Learning behavior introduces recognition
lags so that movements of the perceived target lag those in the target series.

Also included in Figure 1 is a line reflecting the estimate of the constant target from
the constant model. At 4 percent, the estimated constant target seems high for the recent
period, while values of the estimated time-varying target are plausible. Describing his
preference for an inflation target range, Governor Gramlich (2003) recently commented
that he “would personally set the bottom of the range at slightly above 1 percent per year
for the core PCE deflator, ... and ... the top of the range at about 2.5 percent per year. The
midpoint of this range is then slightly less than 2 percent per year, which turns out to be
about what U.S. core PCE inflation has averaged over the past eight years.” The inflation
goal of U.S. monetary policy is usually described as “price stability,” Governor Bernanke
(2003) provided his view of this concept, noting: “Inflation breached the 2 percent barrier
in the spring of 1996 and has remained consistently within the narrow range of 1.5 to 2
percent for the past six and a half years—for practical purposes, a good approximation to
price stability.”

19



More intriguing information

1. Implementation of the Ordinal Shapley Value for a three-agent economy
2. Macroeconomic Interdependence in a Two-Country DSGE Model under Diverging Interest-Rate Rules
3. Regional Intergration and Migration: An Economic Geography Model with Hetergenous Labour Force
4. Qualification-Mismatch and Long-Term Unemployment in a Growth-Matching Model
5. The name is absent
6. Quelles politiques de développement durable au Mali et à Madagascar ?
7. The name is absent
8. Synchronisation and Differentiation: Two Stages of Coordinative Structure
9. The Nobel Memorial Prize for Robert F. Engle
10. The name is absent
11. A model-free approach to delta hedging
12. The name is absent
13. The Structure Performance Hypothesis and The Efficient Structure Performance Hypothesis-Revisited: The Case of Agribusiness Commodity and Food Products Truck Carriers in the South
14. Deprivation Analysis in Declining Inner City Residential Areas: A Case Study From Izmir, Turkey.
15. Expectation Formation and Endogenous Fluctuations in Aggregate Demand
16. The name is absent
17. INSTITUTIONS AND PRICE TRANSMISSION IN THE VIETNAMESE HOG MARKET
18. The name is absent
19. Whatever happened to competition in space agency procurement? The case of NASA
20. DISCRIMINATORY APPROACH TO AUDITORY STIMULI IN GUINEA FOWL (NUMIDA MELEAGRIS) AFTER HYPERSTRIATAL∕HIPPOCAMP- AL BRAIN DAMAGE