DP16262 The Power of Open-Mouth Policies

Author(s): Vadym Lepetyuk, Lilia Maliar, Serguei Maliar, John B. Taylor
Publication Date: June 2021
Keyword(s): Average Inflation Targeting, monetary policies, news shocks, nonstationary models, Price-Level Targeting, Regime switches, time-dependent models, time-varying parameters, turnpike theorem, Unbalanced growth
JEL(s): C61, C63, C68, E31, E52
Programme Areas: Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16262

Central bank's announcements about future monetary policy make economic agents to react before the announced policy takes place. We evaluate the anticipation effects of such announcements in the context of a realistic dynamic economic model of central banking. In our experiments, we consider temporary and permanent anticipated changes in policy rules including changes in inflation target, natural rate of interest and Taylor-rule coefficients, as well as anticipated switches from inflation targeting to price-level targeting and average inflation targeting. We show that the studied nonrecurrent news shocks about future policies have sizable anticipation effects on the economy. Our methodological contribution is to develop a novel perturbation-based framework for constructing nonstationary solutions to economic models with nonrecurrent news shocks.