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Is a «Soft» Monetary Authority Appropriate?

Author

Listed:
  • Carlos Esteban Posada

    (Universidad EAFIT)

  • Alfredo Villca

    (Universidad EAFIT)

Abstract

Taking the «objective inflation strategy» as a frame of reference, it is usual to discuss what is most convenient for a society in terms of the degree of «hardness» or «aggressiveness» of a monetary authority to defend its inflation target, and the credibility it has among the economic agents. In this document we use a NeoKeynesian Stochastic Dynamic General Equilibrium (DSGE) model both with rational and adaptive expectations to analyze this question and we also quantify the effects of these two types of authorities on social welfare using an utility function. Our results suggest that the problem that can be derived from a «soft» authority is to risk the loss of credibility in its (supposed) effort to reach a certain inflation target.

Suggested Citation

  • Carlos Esteban Posada & Alfredo Villca, 2017. "Is a «Soft» Monetary Authority Appropriate?," Ensayos de Política Económica, Departamento de Investigación Francisco Valsecchi, Facultad de Ciencias Económicas, Pontificia Universidad Católica Argentina., vol. 2(5), pages 57-77, Octubre.
    • Handle: RePEc:atw:epecon:v:2:y:2017:i:5:p:57-77
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Inflation Target; Monetary Authority; Dynamic Stochastic General Equilibrium Models; Taylor Rule; Credibility.;
    All these keywords.

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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