Economics Working Paper 21106
Central banks announcements of future monetary policy and future states of the economy make economic agents to react before the announced changes take place. We evaluate these anticipation effects in the context of a realistic dynamic economic model of central banking. In our experiments, we consider temporary and permanent anticipated changes in the model’s parameters such as the inflation target, natural rate of interest and Taylor-rule coefficients, as well as anticipated switches in policy rules from a constant target interest rate to the standard interest rate rule leading to a time-varying target interest rate, and from inflation targeting to price-level targeting and average inflation targeting. We find that announced temporary and permanent changes have sizable anticipation effects on the real economy. Our methodological contribution is to develop novel perturbation-based framework suitable for analyzing anticipated changes.
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