“Talking Down Monetary Policy” – A Note

There is a recent debate about whether monetary policy is no longer ef- fective in stimulating demand, a concern often voiced in the euro area. As a response, the ECB warns against \talking down monetary policy" (ECB Vice-President Vitor Constancio, 2016). This note uses a textbook model of...

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izdano v:MAGKS - Joint Discussion Paper Series in Economics (Band 26-2016b)
Glavni avtor: Tillmann, Peter
Format: Artikel
Jezik:angleščina
Izdano: Philipps-Universität Marburg 2016
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Izvleček:There is a recent debate about whether monetary policy is no longer ef- fective in stimulating demand, a concern often voiced in the euro area. As a response, the ECB warns against \talking down monetary policy" (ECB Vice-President Vitor Constancio, 2016). This note uses a textbook model of optimal monetary policy to study a situation in which the public misperceives the interest rate elasticity of aggregate demand, which reflects policy effectiveness. We show that as a result of underestimating policy effectiveness demand shocks can no longer be stabilized perfectly, thus resulting in ineffcient inflation and output dynamics. In the presence of misperceptions, a negative demand shocks leads to a prolonged period of negative in ation rates.
Fizični opis:10 Seiten
ISSN:1867-3678
DOI:10.17192/es2024.0475