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| Author: | Fève, P. Matheron, J. Sahuc, J-G. |
| Title: | Inflation target shocks and monetary policy inertia in the Euro area |
| Journal: | Economic Journal
2010 : SEP, VOL. 120:547, p. 1100-1124 |
| Index terms: | monetary policy inflation currency business cycles Bayesian statistics estimation models European Monetary System |
| Freeterms: | EMS EMU |
| Language: | eng |
| Abstract: | The euro area (here as: E-a.) has experienced a marked downward trend in inflation over the past decades and a lenghtened period of depressed activity. It is questioned if permanent and gradual shifts in monetary policy can be held responsible for these dynamics. This study embeds serially correlated changes in the inflation target (here as: i-t.) into a DSGE model with real and nominal frictions. Through formal Bayesian estimation, it is suggested that gradual changes in the i-t. have had a key role in the E-a. business cycle. Through counter-factual exercises, it is shown that the E-a. would have experienced more sustained growth than it actually did if monetary policy had implemented its new inflation objective at a faster rate. |
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