Learning with uncertain inflation target

In a standard new Keynesian framework we derive the conditions under which increasing the inflation target does not deliver expectational instability. We consider two monetary policy regimes with respect to information about the inflation target. Under transparency, there is full disclosure of the inflation target, while, under opacity, the private sector uses optimal Kalman filter to disentangle persistent and transitory increases in the inflation target. Interestingly, the analytical condition that guarantees asymptotical E-stability under transparency is the same that we obtain for a variety of calibrations under opacity. On the other hand, under transparency the transition to the long-run equilibrium is faster and the variance of inflation is lower. Our results are consistent with the view that increasing the inflation target can be used as a policy instrument without unanchoring expectations.