Monetary policy regimes and inflation in the new-Keynesian model

Matching Benati's result requires a reduction in an exogenous, hence structural, source of persistence. However, inflation in the model inherits additional, non-structural, persistence from the process that governs the inflation target. As a result, the model is able to replicate measures of inflation persistence, even after conditioning on inflation's driving processes. Agents with rational expectations and knowledge of the current inflation target will be aware of the possibility of a future target switch, causing their expectations to appear biased in small samples. Finally, with sticky nominal prices a discrete drop to the low-inflation target requires a loss of output while previously-set prices adjust.