The Monetary Policy Credibility Channel and the Amplification Effects in a Semi-structural Model
IMF Working Papers, September 25, 2020
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- The Monetary Policy Credibility Channel and the Amplification Effects in a Semi-structural Model
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Bibliographic details
- Authors: Thitipat Chansriniyom, Natan P. Epstein, Valeriu Nalban
- Published: September 25, 2020
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513557717.001
Summary and research question
- Extends a standard semi-structural model to account for nonlinear and asymmetric effects of monetary policy credibility.
- Central bank credibility is modeled as proportional to the deviation of inflation expectations from the announced inflation target.
- Positive deviations of expectations from the target are modeled as more costly compared to negative deviations.
- Losses in policy credibility from shocks produce a more persistent, backward-looking inflation process and are associated with lower output.
- The extended model is evaluated against past episodes for Indonesia and Philippines.
- The paper considers adaptation of the model to integrated policy frameworks as an area for further exploration.
Model mechanics and core assumptions
- Credibility measure: proportional to deviation of inflation expectations from the announced inflation target.
- Asymmetry: positive deviations are more costly than negative deviations.
- Credibility loss effect: leads to increased inflation persistence via a more backward-looking inflation process.
- Macro linkage: credibility dynamics interact with output, producing lower output when credibility weakens.
Key findings and empirical fit
- The extended model with credibility effects matches well the key macroeconomic data over specific past episodes for Indonesia and Philippines.
- Credibility losses amplify shocks by:
- Increasing inflation persistence.
- Lowering output.
- The model captures nonlinear and asymmetric transmission of monetary policy through the credibility channel.
Policy implications and recommendations for further work
- Recognize credibility as a state variable that can amplify monetary policy shocks and affect inflation persistence and output.
- Consideration for policymakers:
- Policy design should account for asymmetries in the costs of expectation deviations above versus below the inflation target.
- Restoring or maintaining credibility can mitigate longer-run persistence in inflation and support output.
- Research directions:
- Adaptation of the extended model to integrated policy frameworks is suggested as an area for further exploration.
Publication and metadata
- Authors: Thitipat Chansriniyom, Natan P. Epstein, Valeriu Nalban
- Date: September 25, 2020
- Series: IMF Working Papers
- Working Paper No.: 2020/201
- Pages: 34
- Volume: 2020
- Issue: 201
- DOI: https://doi.org/10.5089/9781513557717.001
- Stock No: WPIEA2020201
- ISBN: 9781513557717
- ISSN: 1018-5941
- Subjects: Central bank policy rate, Financial services, Inflation, Inflation targeting, Monetary policy, Output gap, Price stabilization, Prices, Production
- Keywords: Asia and Pacific, Central bank policy rate, exchange rate, high-inflation regime, Indonesia, Inflation, inflation development, inflation deviation, inflation expectation, Inflation expectations, inflation persistence, inflation target, Inflation targeting, inflation variability, Monetary policy credibility, MP credibility, Output gap, Philippines, Price stabilization, Southeast Asia, transmission mechanism, WP
IMF Working Paper No. 2020/201 (September 25, 2020) — The Monetary Policy Credibility Channel and the Amplification Effects in a Semi-structural Model
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