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The signaling effect of raising inflation

Author

Listed:
  • Eric Mengus

    (HEC Paris)

  • Jean Barthelemy

    (Sciences Po.)

Abstract
This paper argues that central bankers can raise inflation to signal their ability to commit to forward guidance policies. As inflation can be stabilized in normal times either because of central banker’s commitment ability or because of his aversion to inflation, the private sector is unable to infer the central banker’s type from observing stable inflation before a liquidity trap, jeopardizing the efficiency of forward guidance policy. We derive optimal policy in a new-Keynesian model subject to liquidity traps where agents are uncertain about the central banker’s type and we show that the central banker with commitment ability can signal its type by raising inflation before a trap. The corresponding level of signaling inflation increases with the frequency, the severity as well as with the length of liquidity traps. Finally, we show that this signaling motive can explain level of inflation well above 2%.

Suggested Citation

  • Eric Mengus & Jean Barthelemy, 2016. "The signaling effect of raising inflation," 2016 Meeting Papers 1190, Society for Economic Dynamics.
    • Handle: RePEc:red:sed016:1190
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    Cited by:

    1. Calvin He, 2021. "Monetary Policy, Equity Markets and the Information Effect," RBA Research Discussion Papers rdp2021-04, Reserve Bank of Australia.
    2. Philippe Andrade & Gaetano Gaballo & Eric Mengus & Benoît Mojon, 2019. "Forward Guidance and Heterogeneous Beliefs," American Economic Journal: Macroeconomics, American Economic Association, vol. 11(3), pages 1-29, July.
    3. Batista, Quentin & Nakata, Taisuke & Sunakawa, Takeki, 2023. "Credible Forward Guidance," Journal of Economic Dynamics and Control, Elsevier, vol. 153(C).
    4. Mengus, Eric & Barthelemy, Jean, 2017. "Monetary Rules, Determinacy and Limited Enforcement," HEC Research Papers Series 1202, HEC Paris, revised 11 May 2019.
    5. Tillmann Peter, 2021. "Robust Monetary Policy Under Uncertainty About the Lower Bound," The B.E. Journal of Macroeconomics, De Gruyter, vol. 21(1), pages 309-321, January.
    6. Peter Tillmann, 2019. "Robust Monetary Policy Under Uncertainty About the Lower Bound," MAGKS Papers on Economics 201914, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).

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    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes

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