Monetary Policy, Nominal Interest Rates, and Long-Horizon Inflation Uncertainty
AbstractEmpirical evidence presented in this paper shows that the predictability of inflation at long horizons varies considerably across countries. Both simple theory and empirical evidence suggest that the crucial factor is the extent to which systematic monetary policy succeeds in preventing a unit root in inflation. The mechanism by which it does this appears however to be complicated by strong empirical evidence that nominal as well as real interest rates have real effects, which implies that monetary policy need not be so vigorous in reactions to inflation. This helps to explain why inflation rates in the US and (especially) Germany have been relatively predictable, despite monetary policy rules which appear to have been barely stabilising. The paper also presents tentative evidence that the power of nominal interest rate effects is inversely related to long-horizon inflation uncertainty, and hence ultimately uncertainty about monetary policy. Copyright 2002 by Scottish Economic Society.
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Bibliographic InfoArticle provided by Scottish Economic Society in its journal Scottish Journal of Political Economy.
Volume (Year): 49 (2002)
Issue (Month): 1 (February)
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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0036-9292
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Other versions of this item:
- Wright, Stephen, 1998. "Monetary Policy, Nominal Interest Rates, and Long-horizon Inflation Uncertainty," Cambridge Working Papers in Economics 9820, Faculty of Economics, University of Cambridge.
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
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