Monetary Policy and Economic Stability: a DSGE Approach to Trend Inflation in Morocco

This article explores the impact of trend inflation on monetary policy under a higher inflation target. Adding trend inflation to DSGE models helps us understand the inflation gap better; the gap is less persistent when it is measured as a deviation from trend instead of as a constant average. A high inflation target is likely to overshoot unless the monetary authorities adopt restrictive measures to keep output below its deterministic equilibrium. Indeed, Bank Al-Maghrib raised its key rate by 0.25 percentage points to achieve an inflation rate of 2%, underscoring the importance of maintaining this trajectory. The study identifies key policy implications: higher trend inflation destabilizes expectations, forcing monetary policy to react more to inflation deviations and less to output gaps in high-target environments. These conclusions hold for different parameterizations and specifications of the Taylor rule (backward-looking, forward-looking, and inertial). In addition, Taylor rules based on output growth rather than output gaps widen the zone of determinism, making it easier to adopt a single reference value.