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Inflation Targeting, Recursive Inattentiveness, and Heterogeneous Beliefs
Author(s) -
AGLIARI ANNA,
MASSARO DOMENICO,
PECORA NICOLÒ,
SPELTA ALESSANDRO
Publication year - 2017
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/jmcb.12425
Subject(s) - determinacy , monetary policy , rational expectations , economics , inflation (cosmology) , imperfect , inflation targeting , order (exchange) , perfect information , simple (philosophy) , mathematical economics , microeconomics , econometrics , keynesian economics , mathematics , mathematical analysis , linguistics , philosophy , physics , finance , epistemology , theoretical physics
We consider a monetary authority that provides an explicit inflation target in order to align expectations with the policy objective. However, biased perceptions of the target may arise due to imperfect information flows. We allow agents to revise expectations over time and we model their recursive choice among prediction strategies as an optimization problem under rational inattention. We then investigate whether a simple policy rule can steer the economy toward the targeted equilibrium. Our findings suggest that determinacy under rational expectations may not be sufficient to reach the target. Instead, monetary policy should be fine‐tuned to correct agents' biased beliefs.