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The Inflation-Output Variability Tradeoff and Monetary Policy: Evidence from a GARCH Model

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  • Jim Lee

    ()
    (Texas A&M University–Corpus Christi)

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Abstract

This paper empirically investigates the Taylor curve volatility tradeoff in light of the stochastic behavior of the conditional variances of output and inflation. Stressing structural instability between periods before and after the 1979–1982 monetary policy regime change, I implement a bivariate generalized autoregressive conditional heteroskedasticity model to capture the output-inflation variability tradeoff and to explore the plausible impact of a change in the federal funds rate on the two conditional volatilities. I further evaluate the impacts of anticipated and unanticipated policy actions measured by two alternative policy reaction functions—one from a vector-autoregression-based reduced-form equation and another based on the Taylor rule. In addition to showing a volatility tradeoff relationship, the empirical model reveals different magnitudes of policy effects on output and inflation volatility across the two sample periods.

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Bibliographic Info

Article provided by Southern Economic Association in its journal Southern Economic Journal.

Volume (Year): 69 (2002)
Issue (Month): 1 (July)
Pages: 175-188

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Handle: RePEc:sej:ancoec:v:69:1:y:2002:p:175-188

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Web page: http://www.southerneconomic.org/
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Cited by:
  1. Ho, Kin Yip & Tsui, Albert K.C., 2004. "Analysis of real GDP growth rates of greater China: An asymmetric conditional volatility approach," China Economic Review, Elsevier, Elsevier, vol. 15(4), pages 424-442.
  2. Jorge Andraz & Nélia Norte, 2013. "Output volatility in the OECD: Are the member states becoming less vulnerable to exogenous shocks?," CEFAGE-UE Working Papers 2013_17, University of Evora, CEFAGE-UE (Portugal).
  3. Olson, Eric & Enders, Walter & Wohar, Mark E., 2012. "An empirical investigation of the Taylor curve," Journal of Macroeconomics, Elsevier, Elsevier, vol. 34(2), pages 380-390.
  4. Eliphas Ndou & Nombulelo Gumata & Mthuli Ncube & Eric Olson, 2013. "Working Paper 189 - An Empirical Investigation of the Taylor Curve in South Africa," Working Paper Series, African Development Bank 992, African Development Bank.
  5. Guang Yang, 2009. "Local government expenditure, RBC model and regional business cycle in China-Take Tianjin for example," Frontiers of Economics in China, Springer, Springer, vol. 4(4), pages 588-600, December.

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