Abstract
This paper argues that central bankers should temporarily raise inflation when anticipating liquidity traps to ensure the credibility of otherwise time-inconsistent forward guidance policies. As stable inflation in normal times either stems from central bankers' desire to maintain credibility or from aversion to inflation, the private sector is unable to infer the central banker's willingness to follow through on promises from observing stable inflation, jeopardizing the efficiency of forward guidance policy. We show that this signaling motive can justify temporary deviations of inflation from target well above 2%, but also that the low inflation volatility during the Great Moderation was insufficient to ensure fully efficient forward guidance when needed.
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
