Journal article
Learning About Inflation Measures for Interest Rate Rules
IMF working paper, v 10(296)
2010
Abstract
Empirical evidence suggests that goods are highly heterogeneous with respect to the degree of price rigidity. We develop a DSGE model featuring heterogeneous nominal rigidities across two sectors to study the equilibrium determinacy and stability under adaptive learning for interest rate rules that respond to inflation measures differing in their degree of price stickiness. We find that rules responding to headline inflation measures that assign a positive weight to the inflation of the sector with low price stickiness are more prone to generate macroeconomic instability than rules that respond exclusively to the inflation of the sector with high price stickiness. By this we mean that they are more prone to induce nonlearnable fundamental-driven equilibria, learnable self-fulfilling expectations equilibria, and equilibria where fluctuations are unbounded. We discuss how our results depend on the elasticity of substitution across goods, the degree of heterogeneity in price rigidity, as well as on the timing of the rule.
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Details
- Title
- Learning About Inflation Measures for Interest Rate Rules
- Creators
- Luis-Felipe Zanna - International Monetary FundMarco Airaudo - Drexel University
- Publication Details
- IMF working paper, v 10(296)
- Number of pages
- 3
- Resource Type
- Journal article
- Language
- English
- Academic Unit
- Economics (School of Economics)
- Other Identifier
- 991020534928804721