ECB paper finds strong policy can stop expectations de-anchoring
Communicating counterfactual scenarios can help to inform monetary policy decisions
A forceful response to external shocks can prevent medium-term inflation expectations from de-anchoring, a new paper from the European Central Bank shows.
The study, published on July 29, develops a “regime-switching dynamic stochastic general equilibrium model” in which prolonged periods of a central bank “looking through” an external shock lead to de-anchored medium-term inflation expectations.
The authors, ECB economists Kai Christoffel and Mátyás Farkas, say that although looking through the
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