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Optimal Inflation Target: Insights from an Agent-Based Model | Jean-Philippe Bouchaud
; Stanislao Gualdi
; Marco Tarzia
; Francesco Zamponi
; | Date: |
15 Sep 2017 | Abstract: | Which level of inflation should Central Banks be targeting? We investigate
this issue in the context of a simplified Agent Based Model of the economy.
Depending on the value of the parameters that describe the micro-behaviour of
agents (in particular inflation anticipations), we find a surprisingly rich
variety of behaviour at the macro-level. Without any monetary policy, our ABM
economy can be in a high inflation/high output state, or in a low inflation/low
output state. Hyper-inflation, stagflation, deflation and business cycles are
also possible. We then introduce a Central Bank with a Taylor-rule-based
inflation target, and study the resulting aggregate variables. Our main result
is that too low inflation targets are in general detrimental to a CB-controlled
economy. One symptom is a persistent under-realisation of inflation, perhaps
similar to the current macroeconomic situation. This predicament is alleviated
by higher inflation targets that are found to improve both unemployment and
negative interest rate episodes, up to the point where erosion of savings
becomes unacceptable. Our results are contrasted with the predictions of the
standard DSGE model. | Source: | arXiv, 1709.5117 | Services: | Forum | Review | PDF | Favorites |
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