Working Paper
Using a projection method to analyze inflation bias in a micro-founded model
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 to the problem 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.
Keywords: Inflation (Finance); Econometric models;
Access Documents
File(s): File format is text/html http://www.federalreserve.gov/pubs/feds/2010/201018/201018abs.html
File(s): File format is application/pdf http://www.federalreserve.gov/pubs/feds/2010/201018/201018pap.pdf
Authors
Bibliographic Information
Provider: Board of Governors of the Federal Reserve System (U.S.)
Part of Series: Finance and Economics Discussion Series
Publication Date: 2010
Number: 2010-18