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The Dynamics of US Inflation: Can Monetary Policy Explain the Changes?

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  • Fabio Canova
  • Filippo Ferroni

Abstract

We investigate the relationship between monetary policy and inflation dynamics in the US using a medium scale structural model. The specification is estimated with Bayesian techniques and fits the data reasonably well. Policy shocks account for a part of the decline in inflation volatility; they have been less effective in triggering inflation responses over time and qualitatively account for the rise and fall in the level of inflation. A number of structural parameter variations contribute to these patterns.

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Bibliographic Info

Paper provided by Barcelona Graduate School of Economics in its series Working Papers with number 471.

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Date of creation: Jun 2010
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Handle: RePEc:bge:wpaper:471

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Keywords: New Keynesian model; Bayesian methods; Monetar ypolicy; Inflation dynamics;

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  1. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules And Macroeconomic Stability: Evidence And Some Theory," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 115(1), pages 147-180, February.
  2. Peter N. Ireland, 2001. "Money's Role in the Monetary Business Cycle," NBER Working Papers 8115, National Bureau of Economic Research, Inc.
  3. Luca Gambetti & Evi Pappa & Fabio Canova, 2005. "The structural dynamics of US output and inflation: What explains the changes?," Economics Working Papers 921, Department of Economics and Business, Universitat Pompeu Fabra.
  4. Gabriel Perez-Quiros & Margaret M. McConnell, 2000. "Output Fluctuations in the United States: What Has Changed since the Early 1980's?," American Economic Review, American Economic Association, vol. 90(5), pages 1464-1476, December.
  5. Frank Smets & Raf Wouters, 2007. "Shocks and Frictions in US Business Cycles : a Bayesian DSGE Approach," Working Paper Research, National Bank of Belgium 109, National Bank of Belgium.
  6. Marco Del Negro & Frank Schorfheide, 2002. "Priors from general equilibrium models for VARs," Working Paper, Federal Reserve Bank of Atlanta 2002-14, Federal Reserve Bank of Atlanta.
  7. Peter N. Ireland, 2000. "Sticky-Price Models of the Business Cycle: Specification and Stability," NBER Working Papers 7511, National Bureau of Economic Research, Inc.
  8. Marco Del Negro & Frank Schorfheide, 2008. "Forming priors for DSGE models (and how it affects the assessment of nominal rigidities)," Staff Reports 320, Federal Reserve Bank of New York.
  9. Alvarez, Fernando E & Lippi, Francesco, 2007. "Financial Innovation and the Transactions Demand for Cash," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6472, C.E.P.R. Discussion Papers.
  10. Alejandro Justiniano & Giorgio E. Primiceri, 2008. "The Time-Varying Volatility of Macroeconomic Fluctuations," American Economic Review, American Economic Association, vol. 98(3), pages 604-41, June.
  11. Canova, Fabio & Gambetti, Luca, 2009. "Do expectations matter? The Great Moderation revisited," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7597, C.E.P.R. Discussion Papers.
  12. Jean Boivin & Marc P. Giannoni, 2003. "Has Monetary Policy Become More Effective?," NBER Working Papers 9459, National Bureau of Economic Research, Inc.
  13. Roberts, John M, 2006. "Monetary Policy and Inflation Dynamics," MPRA Paper 812, University Library of Munich, Germany.
  14. John Geweke, 1998. "Using simulation methods for Bayesian econometric models: inference, development, and communication," Staff Report, Federal Reserve Bank of Minneapolis 249, Federal Reserve Bank of Minneapolis.
  15. Christopher A. Sims & Tao Zha, 2005. "Were There Regime Switches in U.S. Monetary Policy?," Working Papers 92, Princeton University, Department of Economics, Center for Economic Policy Studies..
  16. Fabio Canova & Luca Gambetti, 2003. "Structural changes in the US economy: is there a role for monetary policy?," Economics Working Papers 918, Department of Economics and Business, Universitat Pompeu Fabra, revised Apr 2008.
  17. Ben S. Bernanke & Ilian Mihov, 1998. "Measuring Monetary Policy," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 113(3), pages 869-902, August.
  18. Leeper, Eric M. & Zha, Tao, 2003. "Modest policy interventions," Journal of Monetary Economics, Elsevier, Elsevier, vol. 50(8), pages 1673-1700, November.
  19. Luca Gambetti & Jordi Gal�, 2009. "On the Sources of the Great Moderation," American Economic Journal: Macroeconomics, American Economic Association, vol. 1(1), pages 26-57, January.
  20. Yongsung Chang & Taeyoung Doh & Frank Schorfheide, 2007. "Non-stationary Hours in a DSGE Model," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 39(6), pages 1357-1373, 09.
  21. Jesús Fernández-Villaverde & Juan F. Rubio-Ramírez, 2008. "How Structural Are Structural Parameters?," NBER Chapters, in: NBER Macroeconomics Annual 2007, Volume 22, pages 83-137 National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Cristiano Cantore & Filippo Ferroni & Miguel A León-Ledesma, 2012. "Interpreting the Hours-Technology time-varying relationship," Studies in Economics, Department of Economics, University of Kent 1201, Department of Economics, University of Kent.
  2. Kemal Bagzibagli, 2012. "Monetary Transmission Mechanism and Time Variation in the Euro Area," Discussion Papers, Department of Economics, University of Birmingham 12-12, Department of Economics, University of Birmingham.
  3. Gunnar BÃ¥rdsen & Luca Fanelli, 2013. "Frequentist evaluation of small DSGE models," Working Paper Series, Department of Economics, Norwegian University of Science and Technology 14113, Department of Economics, Norwegian University of Science and Technology.
  4. Fabio Canova & Fernando J. P�rez Forero, 2012. "Estimating Overidentified, Nonrecursive Time-Varying Coefficients Structural VARs," Working Papers 637, Barcelona Graduate School of Economics.
  5. Steffen Henzel & Elisabeth Wieland, 2013. "Synchronization and Changes in International Inflation Uncertainty," CESifo Working Paper Series 4194, CESifo Group Munich.
  6. Thomai Filippeli & Konstantinos Theodoridis, 2014. "DSGE Priors for BVAR Models," Working Papers, Queen Mary, University of London, School of Economics and Finance 713, Queen Mary, University of London, School of Economics and Finance.

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