Working Paper: CEPR ID: DP16262
Authors: Vadym Lepetyuk; Lilia Maliar; Serguei Maliar; John B. Taylor
Abstract: Central bank's announcements about future monetary policy make economic agents to react beforethe announced policy takes place. We evaluate the anticipation effects of such announcements in thecontext of a realistic dynamic economic model of central banking. In our experiments, we consider temporary and permanent anticipated changes in policy rules including changes in inflation target, naturalrate of interest and Taylor-rule coefficients, as well as anticipated switches from inflation targeting toprice-level targeting and average inflation targeting. We show that the studied nonrecurrent news shocksabout future policies have sizable anticipation effects on the economy. Our methodological contributionis to develop a novel perturbation-based framework for constructing nonstationary solutions to economicmodels with nonrecurrent news shocks.
Keywords: news shocks; turnpike theorem; time-dependent models; nonstationary models; unbalanced growth; time-varying parameters; regime switches; monetary policies; price-level targeting; average inflation targeting
JEL Codes: C61; C63; C68; E31; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Central bank announcements (E52) | economic agents' reactions (D84) |
| Anticipated changes in the natural rate of interest (E43) | output (C67) |
| Anticipated changes in the natural rate of interest (E43) | investment (G31) |
| Postponing an increase in the inflation target by one year (E31) | output during the transition to a new steady state (D57) |
| Central bank's forward guidance about its return to standard interest rate policy (E52) | output expansion (E23) |
| Switch from inflation targeting to price-level targeting (E31) | impacts (F69) |
| Transition to average inflation targeting (E63) | anticipation effects (D84) |