The stability of learning prior to an anticipated change in the target inflation rate Online publication date: Tue, 16-Aug-2016
by Bartholomew Moore
International Journal of Monetary Economics and Finance (IJMEF), Vol. 9, No. 3, 2016
Abstract: I examine the stability of least-squares learning in a flexible-price endowment economy when there is an anticipated change in the inflation target. Monetary policy follows a Taylor rule and a change in the target is announced several periods in advance. I show that highly plausible parameter values may lead to short-run instability and that the conditions for the stability of learning are more demanding soon after the policy change is announced. Also, the farther in advance the change is announced the narrower is the range of policy parameters that generate stability. This is because with a long transition, any estimation error is projected farther into the future and its effects are therefore magnified. These results suggest that advance communication of a change in the inflation target may destabilise inflation in the short run; when the central bank changes its inflation target, a brief transition may be preferable.
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