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Monetary Policy Regimes and Beliefs

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  • David Andolfatto

    (Simon Fraser University)

  • Paul Gomme

    (Federal Reserve Bank of Cleveland)

Abstract

This article investigates the role of beliefs over monetary policy in propagating the effects of monetary policy shocks within the context of a dynamic, stochastic general equilibrium model. In our model, monetary policy periodically switches between low and high money growth regimes. When individuals are unable to observe the regime directly, they form inferences over regime-type based on historical money growth rates. For an empirically plausible money growth process, beliefs evolve slowly in the wake of a regime change. As a result, our model is able to capture some of the observed persistence of real and nominal variables following such a regime change. Copyright 2003 By The Economics Department Of The University Of Pennsylvania And Osaka University Institute Of Social And Economic Research Association

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Bibliographic Info

Article provided by Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association in its journal International Economic Review.

Volume (Year): 44 (2003)
Issue (Month): 1 (February)
Pages: 1-30

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Handle: RePEc:ier:iecrev:v:44:y:2003:i:1:p:1-30

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  1. Edward C. Prescott, 1986. "Theory ahead of business cycle measurement," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 9-22.
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  8. Christina D. Romer & David H. Romer, 1990. "Does Monetary Policy Matter? A New Test in the Spirit of Friedman and Schwartz," NBER Working Papers 2966, National Bureau of Economic Research, Inc.
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  15. Wilbur John Coleman II, 1989. "Equilibrium in a production economy with an income tax," International Finance Discussion Papers 366, Board of Governors of the Federal Reserve System (U.S.).
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