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Monetary Policy with Uncertain Inflation Persistence
Author:
Luis Brandão-Marques https://isni.org/isni/0000000404811396 International Monetary Fund

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,
Roland Meeks
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https://orcid.org/0000-0002-1321-3182
, and
Vina Nguyen
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Series:
IMF Working Papers
Volume/Issue:
Volume 2024: Issue 047
Language:
English
Publication Date:
08 Mar 2024
DOI:
https://doi.org/10.5089/9798400269394.001
ISBN:
9798400269394
ISSN:
1018-5941
Pages:
32
Keywords:
Robust policy; monetary policy; uncertainty; inflation persistence; wage and price dynamics.; Monetary Policy stance; policy rule parameter; price Persistence; IMF working paper 2024/47; inflation expectation; Inflation; Central bank policy rate; Output gap; Wages; Europe; Central and Eastern Europe; Eastern Europe
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IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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When uncertain about inflation persistence, central banks are well-advised to adopt a robust strategy when setting interest rates. This robust approach, characterized by a "better safe than sorry" philosophy, entails incurring a modest cost to safeguard against a protracted period of deviating inflation. Applied to the post-pandemic period of exceptional uncertainty and elevated inflation, this strategy would have called for a tightening bias. Specifically, a high level of uncertainty surrounding wage, profit, and price dynamics requires a more front-loaded increase in interest rates compared to a baseline scenario which the policymaker fully understands how shocks to those variables are transmitted to inflation and output. This paper provides empirical evidence of such uncertainty and estimates a New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model for the euro area to derive a robust interest rate path for the ECB which serves to illustrate the case for insuring against inflation turning out to have greater persistence.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund