Discussion paper

DP16262 The Power of Open-Mouth Policies

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.


Lepetyuk, V, S Maliar and J Taylor (2021), ‘DP16262 The Power of Open-Mouth Policies‘, CEPR Discussion Paper No. 16262. CEPR Press, Paris & London. https://cepr.org/publications/dp16262