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Learning About Inflation Measures for Interest Rate Rules, Luis-Felipe Zanna, Marco Airaudo

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 non-learnable 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
Table Of Contents
Table of Contents; I. Introduction; II. The Model; A. The Household-Firm Unit; B. The Government; III. Equilibrium Determinacy and Stability under Learning; A. The Methodology; B. The Strong Dichotomy: A Flexible-Price and Sticky-Price Economy; Figures; 1. Forward-Looking Rules in the Dichotomous Economy; C. The General Set-up: The Bils-Klenow Calibration; C.1. Forward-Looking Rules; Tables; 1. Benchmark Calibration; 2. Forward-Looking Rules in the General Set-up; C.2. Other Timings for the Policy Rule; 2. Forward-Looking Rules: Determinacy and E-stability Bounds
Literary Form
non fiction
Description based upon print version of record
Physical Description
1 online resource (47 p.)
Specific Material Designation
Form Of Item

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