Fig. 2
The optimal impact coefficient 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 \(\left \{\gamma _{t}^{b}\right \}_{t=0}^{T+1}=\{1,1,0,0\}\). 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 impact coefficient of the cost-push shock on the output gap in the policy rule, the persistence parameters \(\left (a_{t}^{j}\right)\) are equalized across simulations j={a,b}