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Home > Research > Staff Working Paper No. 565: Ambiguity, monetary policy and trend inflation - Riccardo M Masolo and Francesca Monti
 

Staff Working Paper No. 565: Ambiguity, monetary policy and trend inflation - Riccardo M Masolo and Francesca Monti

13 November 2015

Staff Working Paper No. 565: Ambiguity, monetary policy and trend inflation
Riccardo M Masolo and Francesca Monti

We develop a model that can explain the evolution of trend inflation in the United States in the three decades before the Great Recession as a function of the reduction in uncertainty about the monetary policy maker’s behaviour. The model features ambiguity-averse agents and ambiguity regarding the conduct of monetary policy, but is otherwise standard. Trend inflation arises endogenously and has these determinants: the strength with which the central bank responds to inflation, the degree of uncertainty about monetary policy perceived by the private sector, and, if it exists, the inflation target. Given the importance of monetary policy for the determination of trend inflation, we also study optimal monetary policy in the case of lingering ambiguity.

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