Using a projection method to analyze inflation bias in a micro-founded model

Gary S. Anderson, Jinill Kim, Tack Yun

Research output: Contribution to journalArticle

10 Citations (Scopus)

Abstract

Since Kydland and Prescott (1977) and Barro and Gordon (1983), most studies of the problem of the inflation bias associated with discretionary monetary policy have assumed a quadratic loss function. We depart from the conventional linear-quadratic approach in favor of a projection method approach. We investigate the size of the inflation bias that arises in a microfounded nonlinear environment with Calvo price setting. The inflation bias is found to lie between 1% and 6% for a reasonable range of parameter values, when the bias is defined as the steady-state deviation of the discretionary inflation rate from the optimal inflation rate under commitment.

Original languageEnglish
Pages (from-to)1572-1581
Number of pages10
JournalJournal of Economic Dynamics and Control
Volume34
Issue number9
DOIs
Publication statusPublished - 2010 Oct 1
Externally publishedYes

    Fingerprint

Keywords

  • Discretionary monetary policy
  • Inflation bias
  • Projection methods

ASJC Scopus subject areas

  • Economics and Econometrics
  • Control and Optimization
  • Applied Mathematics

Cite this