Speaker: Alessandro Dovis
Affiliation: University of Pennsylvania
Date and time: Wednesday, June 04, 2025 14:30 (Santiago, GMT-04:00)
Location:

• Auditorio at the Central Bank of Chile, Morandé 115, second floor.
• Online meeting

Registration: seminarios@bcentral.cl

Abstract: The risk of inflation expectations "de-anchoring" is often cited by policymakers as a key justification for aggressive responses to inflationary shocks. We develop a model to analyze the trade-offs central banks face in such situations, and to quantify the economic benefits of stable inflation expectations. We consider a New Keynesian economy in which households and firms are imperfectly informed about the central banker’s objective function, and they learn about it from monetary policy decisions. Recognizing this interaction, the central bank has an incentive to raise interest rates more aggressively after adverse supply shocks, trading off short-run economic costs with more stable inflation expectations going forward. We show that the strength of this mechanism depends on how sensitive long-run inflation expectations are to interest rate changes, and we use high-frequency methods to estimate these elasticities for a group of emerging and advanced economies. When fit to Brazilian data, our model predicts that the swift response to the inflationary shocks of 2021 led to large reputation gains for the central bank and to a sizable improvement in its inflationoutput trade-off.