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SUMMARY:Expectations of Inflation\, Monetary Policy &amp\; the Term Struct
 ure of Interest Rates - Prof Michael Magill\, University of Southern Calif
 ornia
DTSTART:20091106T170000Z
DTEND:20091106T180000Z
UID:TALK21217@talks.cam.ac.uk
CONTACT:Rachel Marston
DESCRIPTION:This paper provides a theoretical framework for understanding 
 how monetary policy can be used to control expectations of inflation. We s
 tudy a simple production economy with a cash-in-advance constraint in whic
 h monetary-fiscal policy is Ricardian. Agents' expectations are modeled as
  probability distributions on a finite set of possible inflation rates. Th
 e monetary authority announces a public forecast of inflation to direct ag
 ents' expectations\, and a bond pricing (term structure of interest rates)
  policy to make the forecast credible. We study conditions under which an 
 announced forecast is compatible with equilibrium---there must be enough w
 eight on inflation to be compatible with a non-negative nominal interest r
 ate. In a stationary setting we exhibit a rank condition on the payoff str
 ucture of the bonds which must be satisfied if the forecast is to be the u
 nique probability distribution compatible with the bond pricing policy\, t
 hereby making it the only possible common expectation of inflation for the
  agents. The model thus provides a formal framework for understanding the 
 conditions under which the policy of inflation targeting can be successful
 .
LOCATION:Room B16\, Faculty of Law
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