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The Signaling Effect of Raising Inflation



Type:   Working paper
Title:   The Signaling Effect of Raising Inflation
Author(s):   Barthélemy, Jean - Département d'économie (Author)
Mengus, Eric - HEC Paris - Recherche - Hors Laboratoire (Author)
Date issued:   2016-08
Series:   Sciences Po Economics Discussion Papers  :  2016-06
Keywords:   [en] Forward guidance, Inflation, Signaling
JEL:   E31,  E52,  E65
Abstract:   [en] This paper argues that central bankers should raise inflation when anticipating liquidity traps to signal their credibility to forward guidance policies. As stable inflation in normal times either stems from central banker's credibility, e.g. through reputation, or from his aversion to inflation, the private sector is unable to infer the central banker's type from observing stable inflation, jeopardizing the efficiency of forward guidance policy. We show that this signaling motive can justify level of inflation well above 2% but also that the low inflation volatility during the Great Moderation was insufficient to ensure fully efficient forward guidance when needed.


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