Ambiguity, Monetary Policy and Trend Inflation

Masolo, Riccardo M.

doi:10.2139/ssrn.2694495

Cited by 6 publications

(3 citation statements)

References 45 publications

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“…In such a world, it is no longer obviously the case that inflation is bad news and disinflation is good news, since monopolists care about both the relative price and the quantity of what they sell. However, Masolo et al (2015) show that trend inflation is worse than trend deflation. Therefore, I impose kinked beliefs on the households.…”

Section: Appendix I: Data Descriptionmentioning

confidence: 98%

Asymmetric inflation expectations, downward rigidity of wages, and asymmetric business cycles

Baqaee

2020

Journal of Monetary Economics

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Household expectations of the inflation rate are much more sensitive to inflation than to disinflation. To the extent that workers have bargaining power in wage determination, this asymmetry in their beliefs can make wages respond quickly to inflationary forces but sluggishly to deflationary ones. I microfound asymmetric household expectations using ambiguity-aversion: households, who do not know the quality of their information, overweight inflationary news since it reduces their purchasing power, and underweight deflationary news since it increases their purchasing power. I embed asymmetric beliefs into a general equilibrium model and show that, in such a model, monetary policy has asymmetric effects on employment, output, and wage inflation in ways consistent with the data. Although wages are downwardly rigid in this environment, monetary policy need not have a bias towards using inflation to grease the wheels of the labor market.

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Section: Appendix I: Data Descriptionmentioning

confidence: 98%

Asymmetric inflation expectations, downward rigidity of wages, and asymmetric business cycles

Baqaee

2020

Journal of Monetary Economics

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“…Whether an upward bias in in ‡ation expectations should be viewed as pessimism or optimism may depend on the time period Bhandari, Borovicka, and Ho (2019). argue that a general interpretation of higher expected in ‡ation as optimism is at odds with surveys of in ‡ation attitudes, but others have argued that a downward bias in in ‡ation expectations could be interpreted as pessimism during speci…c episodes, such as when nominal interest rates are at the zero-lower-bound(Masolo and Monti (2015)). We use "pessimistic" as a short-hand labeling device for upwardly biased in ‡ation expectations, regarding the interpretation as roughly right for households in most time-periods.13 Since the PCs and their factor loadings are not separately identi…able, the loadings are normalized by ( 0 ) =N = I q where N is the number of bias(i) series over which common factors are formred and q is the number of common factors.…”

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confidence: 99%

Belief Distortions and Macroeconomic Fluctuations

Bianchi

Ludvigson

2020

SSRN Journal

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This paper combines a data rich environment with a machine learning algorithm to provide new estimates of time-varying systematic expectational errors ("belief distortions") embedded in survey responses. We find that distortions are large even for professional forecasters, with all respondent-types over-weighting their own beliefs relative to publicly available information. Forecasts of inflation and GDP growth oscillate between optimism and pessimism by large margins, with biases in expectations evolving dynamically in response to cyclical shocks. The results suggest that artificial intelligence algorithms can be productively deployed to correct errors in human judgement and improve predictive accuracy.

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“…They show that a positive long-run trend inflation rate can explain the persistent dynamics of the inflation rate without introducing intrinsic inflation persistence. Masolo and Monti (2017) explain the motion of US trend inflation by introducing Knightian uncertainty to the central bank's monetary policy conduct. While our analysis is based on the optimal discretionary policy, they present a numerical analysis of monetary policy under a Taylor rule.…”

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confidence: 99%

A Note on Robust Monetary Policy and Non-Zero Trend Inflation

Hasui

2018

Macroecon. Dynam.

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This paper studies how model uncertainty influences economic fluctuation when trend inflation is high. We introduce Hansen and Sargent’s [(2008) Robustness, Princeton University Press] robust control techniques into a New Keynesian model with non-zero trend inflation. We reveal the following three points. First, we find that robust monetary policy responds more aggressively. This aggressiveness increases with trend inflation. Second, as the trend inflation rises, the response of macroeconomic variables is larger under robust policy. Third, stronger robustness tends to lead to indeterminate equilibrium as trend inflation increases. Consequently, the economy might be volatile when trend inflation is high due to robustness from the view of both variance and determinacy. We interpret the results as indicating that the model uncertainty might be the one of the factors causing large macroeconomic fluctuations when trend inflation is high.

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Ambiguity, Monetary Policy and Trend Inflation

Cited by 6 publications

References 45 publications

Asymmetric inflation expectations, downward rigidity of wages, and asymmetric business cycles

Asymmetric inflation expectations, downward rigidity of wages, and asymmetric business cycles

Belief Distortions and Macroeconomic Fluctuations

A Note on Robust Monetary Policy and Non-Zero Trend Inflation

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