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



rate are due to transitory policy shocks or to permanent policy shocks that change the
inflation target. Deviations between the estimated actual and perceived target provide
evidence of asymmetric information on the part of private sector agents about the inflation
goal of monetary policy. The results suggest that time-varying natural rates associated
with movements in the perceived inflation target contributed importantly to historical
fluctuations in inflation and long-term interest rates. Both permanent policy shocks and
learning associated with imperfect policy credibility explain movements in the perceived
inflation target.

In the perpetual learning model of the inflation target, the perceived inflation target
is adjusted to reflect deviations of funds rate settings from predictions conditioned on the
perceived inflation target. Although the estimated speed of learning is quite slow—with only
4 percent of the gap between the target and the perceived target closed per quarter—implied
model dynamics and interactions between variables appeared reasonable. Learning behavior
implies lengthy lags between movements in the actual inflation target and the perceived
inflation target. The estimated perceived inflation target tracks movements in long-horizon
survey expectations of inflation quite well. Important dynamic features of the model are
the absence of a price puzzle in the response to a transitory policy shock and permanent
nominal effects of aggregate supply shocks due to partial policy accommodation. In contrast
to standard VARs, the specification can be used to examine the dynamic responses to a
permanent change in the inflation target and to expectations shocks.

Finally, the paper uses simulations to show that faster learning associated with increased
credibility could shorten the transition period to a new inflation target, and reduce the real
effects associated with such a policy change. However, faster learning also implies greater
volatility in response to transitory policy shocks.

28



More intriguing information

1. Ability grouping in the secondary school: attitudes of teachers of practically based subjects
2. The name is absent
3. The Functions of Postpartum Depression
4. PERFORMANCE PREMISES FOR HUMAN RESOURCES FROM PUBLIC HEALTH ORGANIZATIONS IN ROMANIA
5. Lending to Agribusinesses in Zambia
6. An alternative way to model merit good arguments
7. The Clustering of Financial Services in London*
8. BARRIERS TO EFFICIENCY AND THE PRIVATIZATION OF TOWNSHIP-VILLAGE ENTERPRISES
9. Income Taxation when Markets are Incomplete
10. Cyber-pharmacies and emerging concerns on marketing drugs Online
11. New issues in Indian macro policy.
12. The Role of Land Retirement Programs for Management of Water Resources
13. Migrant Business Networks and FDI
14. Does Competition Increase Economic Efficiency in Swedish County Councils?
15. SLA RESEARCH ON SELF-DIRECTION: THEORETICAL AND PRACTICAL ISSUES
16. Word Sense Disambiguation by Web Mining for Word Co-occurrence Probabilities
17. Three Policies to Improve Productivity Growth in Canada
18. The name is absent
19. The Shepherd Sinfonia
20. Citizenship