{
  "title": "Monetary Policy with Uncertain Inflation Persistence",
  "publication": "IMF Working Papers, March 8, 2024",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2024/03/07/monetary-policy-with-uncertain-inflation-persistence-545762",
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  "summary": "When uncertain about inflation persistence, central banks are well-advised to adopt a robust strategy when setting interest rates.",
  "sections": [
    {
      "heading": "Main findings",
      "content": "- When uncertain about inflation persistence, central banks are well-advised to adopt a robust strategy when setting interest rates.\n- The robust approach is characterized by a \"better safe than sorry\" philosophy and entails incurring a modest cost to safeguard against a protracted period of deviating inflation.\n- Applied to the post-pandemic period of exceptional uncertainty and elevated inflation, this strategy would have called for a tightening bias.\n- A high level of uncertainty surrounding wage, profit, and price dynamics requires a more front-loaded increase in interest rates compared to a baseline scenario in which the policymaker fully understands how shocks to those variables are transmitted to inflation and output.\n- The paper provides empirical evidence of such uncertainty."
    },
    {
      "heading": "Methodology and model",
      "content": "- Estimates a New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model for the euro area.\n- Uses the estimated DSGE model to derive a robust interest rate path for the ECB to illustrate insuring against inflation turning out to have greater persistence."
    },
    {
      "heading": "Policy implications and recommendations",
      "content": "- Adopt a robust (insurance) interest-rate strategy under uncertain inflation persistence.\n- Favor a tightening bias—more front-loaded increases in interest rates—when uncertainty about wage, profit, and price dynamics is high.\n- Accept a modest short-term cost as insurance against a protracted deviation of inflation from target.\n\n---\n\n Content in this bundle\n\n- Working Paper\n  - Working Paper (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - Working Paper (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2024/03/07/monetary-policy-with-uncertain-inflation-persistence-545762"
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    "Authors: Luis Brandao Marques, Roland Meeks, Vina Nguyen",
    "Published: March 8, 2024",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9798400269394.001",
    "When uncertain about inflation persistence, central banks are well-advised to adopt a robust strategy when setting interest rates.",
    "The robust approach is characterized by a \"better safe than sorry\" philosophy and entails incurring a modest cost to safeguard against a protracted period of deviating inflation.",
    "Applied to the post-pandemic period of exceptional uncertainty and elevated inflation, this strategy would have called for a tightening bias.",
    "A high level of uncertainty surrounding wage, profit, and price dynamics requires a more front-loaded increase in interest rates compared to a baseline scenario in which the policymaker fully understands how shocks to those variables are transmitted to inflation and output.",
    "The paper provides empirical evidence of such uncertainty.",
    "Estimates a New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model for the euro area.",
    "Uses the estimated DSGE model to derive a robust interest rate path for the ECB to illustrate insuring against inflation turning out to have greater persistence.",
    "Adopt a robust (insurance) interest-rate strategy under uncertain inflation persistence.",
    "Favor a tightening bias—more front-loaded increases in interest rates—when uncertainty about wage, profit, and price dynamics is high.",
    "Accept a modest short-term cost as insurance against a protracted deviation of inflation from target.",
    "**Working Paper**"
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