Abstract
In New Keynesian models favourable cost-push shocks lower inflation and increase output. Yet, when the central bank’s inflation target is not perfectly observed these shocks turn contractionary as agents erroneously perceive a temporary reduction in the target. This effect is amplified when monetary policy is constrained by the effective lower bound on the policy rate.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have