A1916
Title: Inflation expectations and the inflation target: A case of long memory
Authors: Alexander Meyer-Gohde - Goethe-University Frankfurt (Germany) [presenting]
Abstract: In standard rational expectation frameworks, expectations are determined endogenously. A time-varying inflation target however can stand in for shifts in longer-run expectations and the credibility of monetary policy. These low-frequency movements are difficult to capture as DSGE models are strongly mean-reverting with exponential stability. These properties are at odds with empirical literature that points to long memory in inflation. The role of monetary policy's inflation target is examined in a simple three-equation New Keynesian DSGE model and the recent inflation surge. It is shown that incorporating fractional differencing into time-varying inflation targets plausibly matches the empirical autocorrelation of interest rates and inflation generated by the DSGE model in this framework.
