Journal article

Publication year: 2017

Pages: 1443-1447

Journal: Applied Economics Letters

Volume number: 24

Issue number: 20

Open access status: Green

DOI Link: https://doi.org/10.1080/13504851.2017.1282140

Publisher: Taylor and Francis Group

Abstract: 

There is a recent debate about whether ultra-expansionary monetary policy is no longer effective in stimulating demand, a concern often voiced in the euro area in light of persistently low and even negative inflation. As a response, the European Central Bank (ECB) warns against 'talking down monetary policy' (ECB Vice-President Vitor Constancio, 2016). This note uses a textbook model of optimal monetary policy to study a situation in which the public misperceives the interest rate elasticity of aggregate demand, which reflects policy effectiveness. We show that as a result of underestimating policy effectiveness demand shocks can no longer be stabilized perfectly, thus resulting in inefficient inflation and output dynamics. In the presence of misperceptions, a negative demand shock leads to a prolonged period of negative inflation rates.

Harvard Citation style: Tillmann, P. (2017) ‘Talking down monetary policy’ - a note, Applied Economics Letters, 24(20), pp. 1443-1447. https://doi.org/10.1080/13504851.2017.1282140

APA Citation style: Tillmann, P. (2017). ‘Talking down monetary policy’ - a note. Applied Economics Letters. 24(20), 1443-1447. https://doi.org/10.1080/13504851.2017.1282140