Fig. 1
The optimal persistence in the policy rule. The inflation rate, the output gap, and the cost-push shock under two policy simulations. Simulation a (dashed lines) assumes central bank credibilities \(\left \{\gamma _{t}^{a}\right \}_{t=0}^{T+1}=\{1,1,1,0\}\) and simulation b (solid lines) assumes central bank credibilities \(\{\gamma _{t}^{b}\}_{t=0}^{T+1}=\{1,1,0,0\}\). In both simulations, the sequence of cost-push shocks is \(\{u_{t}\}_{t=0}^{T+1}=\{H,0,0,0\}\) and ρu=0. To highlight the difference in the optimal persistence in the policy rule, the impact coefficients of the cost-push shock on the output gap (\(\hat {h}_{t}^{j}\)) are equalized across simulations j={a,b}