Email: mridula.duggal@glasgow.ac.uk
Hi There! I am an Adam Smith Career Development Fellow (Postdoc) at the University of Glasgow. I completed my PhD at Universitat Autònoma de Barcelona and the Barcelona School of Economics.
My research interests are Macroeconomics, Monetary Policy and Subjective Expectations.
I am on the 2024-2025 job market.
Abstract: This paper investigates how agents’ inflation expectations respond to monetary policy changes, using a New Keynesian model with rational expectations, trend inflation, and adaptive learning. Theoretical results suggest that with rational expectations, inflation expectations adjust quickly, driving inflation dynamics, while adaptive learning introduces a more gradual adjustment process dependent on agents’ learning speed. Leveraging a natural experiment with survey data from professional forecasters across 32 countries under Inflation Targeting regimes, I empirically examine these dynamics. Contrary to model predictions, I find that realized inflation leads expectations, with agents often over-predicting inflation following policy changes. This result challenges standard assumptions about the expectations-inflation relationship, suggesting we may overestimate the role of expectations in driving inflation. These findings imply that central banks may enhance credibility by reinforcing targets with actual inflation outcomes, which appear more influential in shaping expectations than previously thought.
Abstract: We examine the challenge faced by a government aiming to implement a gradual reduction in inflation by entrusting monetary policy to an independent central bank with limited credibility. Expanding upon the framework established by Barro and Gordon (1983b), we demonstrate that an optimal policy for minimizing the sacrifice ratio of disinflation involves a gradual disinflationary process coupled with the announcement of intermediate targets. The speed at which disinflation occurs strikes a balance between the objective of enhancing credibility and the associated costs of unexpected inflation. Our theoretical framework provides an explanation for the disinflationary experiences observed in Chile and Colombia during the 1990s, wherein these countries established new monetary institutions and steadily achieved single-digit inflation levels through the annual announcement of decreasing inflation targets. We argue that the use of intermediate targets played a pivotal role in their design, facilitating the establishment of credibility with lower output costs.
The paper investigates the responsiveness of agents’ expectation variance to shifts in monetary policy, utilising subjective expectations to ascertain the speed of learning before and after the implementation of Inflation Targeting. The analysis quantifies the Kalman Gain and the weight agents assign to the inflation target. The findings indicate a sluggish adjustment of agents’ expectations to monetary policy changes, suggesting a reliance on an extended inflation history for expectation formation. Additionally, a minor emphasis on the inflation target by agents is observed. Incorporating these insights into an optimal policy model reveals that, regardless of learning speed, a stronger weight placed on the inflation target by agents diminishes the necessity for aggressive central bank responses during high inflation periods. Furthermore, the central bank’s response aligns more closely with the rational expectations equilibrium when agents allocate a weight of 10% to the inflation target relative to their beliefs.