TY - JOUR
T1 - Evidence on monetary transmission and the role of imperfect information
T2 - Interest rate versus inflation target shocks
AU - Lukmanova, Elizaveta
AU - Rabitsch, Katrin
N1 - Funding Information:
The author acknowledges financial support from the Belgian French-speaking community (ARC research grant 18-23/089).
Publisher Copyright:
© 2023 Elsevier B.V.
PY - 2023/9
Y1 - 2023/9
N2 - We present new empirical evidence on monetary transmission by incorporating two types of shocks – a standard temporary interest rate shock and a persistent inflation target shock. In an estimated DSGE model under imperfect information, where agents may be unable to distinguish these shocks, we find delayed Neo-Fisherian behavior in response to the persistent shock: interest rate and inflation increase, but with a lag. In an empirical VAR model that accounts for such uncertainty in identifying assumptions, we similarly find evidence for positive co-movement of interest rates and inflation in the short aftermath of the persistent shock, however, not on impact. This suggests that, when pursuing a higher inflation target, the central bank needs to engineer an expansionary monetary policy stance by lowering its real interest rate path and also initially lowering the nominal rate to stimulate inflation and inflation expectations.
AB - We present new empirical evidence on monetary transmission by incorporating two types of shocks – a standard temporary interest rate shock and a persistent inflation target shock. In an estimated DSGE model under imperfect information, where agents may be unable to distinguish these shocks, we find delayed Neo-Fisherian behavior in response to the persistent shock: interest rate and inflation increase, but with a lag. In an empirical VAR model that accounts for such uncertainty in identifying assumptions, we similarly find evidence for positive co-movement of interest rates and inflation in the short aftermath of the persistent shock, however, not on impact. This suggests that, when pursuing a higher inflation target, the central bank needs to engineer an expansionary monetary policy stance by lowering its real interest rate path and also initially lowering the nominal rate to stimulate inflation and inflation expectations.
KW - DSGE
KW - Full information
KW - Imperfect information
KW - Learning
KW - Monetary policy
KW - Neo-Fisher effect
KW - Time-varying inflation target
KW - VAR
UR - http://www.scopus.com/inward/record.url?scp=85167833711&partnerID=8YFLogxK
U2 - 10.1016/j.euroecorev.2023.104557
DO - 10.1016/j.euroecorev.2023.104557
M3 - Journal article
AN - SCOPUS:85167833711
SN - 0014-2921
VL - 158
JO - European Economic Review
JF - European Economic Review
M1 - 104557
ER -