A NOTE ON THE ANCHORING EFFECT OF EXPLICIT INFLATION TARGETS Academic Article uri icon

abstract

  • Empirical literature provided convincing evidence that explicit (i.e., legislated) inflation targets anchor expectations. I propose a novel game theoretic framework with generalized timing that allows us to formally capture this beneficialanchoring effect. Using the framework I identify several factors that influence whether and how strongly expectations are anchored, namely (i) the public's cost of decision making, (ii) the public's inflation aversion, (iii) the slope of the Phillips curve, (iv) the magnitude of supply shocks, (v) the degree of central bank conservatism, and under many (but not all) circumstances, (vi) the explicitness of the inflation target.

publication date

  • November 2009

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