Using a projection method to analyze inflation bias in a micro-founded model

Gary S. Anderson, Jinill Kim, Tack Yun

Research output: Contribution to journalArticlepeer-review

12 Citations (Scopus)


Since Kydland and Prescott (1977) and Barro and Gordon (1983), most studies of the problem of the inflation bias associated with discretionary monetary policy have assumed a quadratic loss function. We depart from the conventional linear-quadratic approach in favor of a projection method approach. We investigate the size of the inflation bias that arises in a microfounded nonlinear environment with Calvo price setting. The inflation bias is found to lie between 1% and 6% for a reasonable range of parameter values, when the bias is defined as the steady-state deviation of the discretionary inflation rate from the optimal inflation rate under commitment.

Original languageEnglish
Pages (from-to)1572-1581
Number of pages10
JournalJournal of Economic Dynamics and Control
Issue number9
Publication statusPublished - 2010 Oct
Externally publishedYes


  • Discretionary monetary policy
  • Inflation bias
  • Projection methods

ASJC Scopus subject areas

  • Economics and Econometrics
  • Control and Optimization
  • Applied Mathematics


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