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Monetary Policy, Nominal Interest Rates, and Long-horizon Inflation Uncertainty

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  • Wright, Stephen

Abstract

Empirical 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 stabilising the incipient unit root in inflation. The mechanism by which it does this appears, however, to be complicated by strong empirical evidence that nominal interest rates have real effects, which implies that monetary policy need not be so vigorous in reaction to inflation. This helps 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.

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Bibliographic Info

Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 9820.

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Date of creation: Oct 1998
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Handle: RePEc:cam:camdae:9820

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Web page: http://www.econ.cam.ac.uk/index.htm

Related research

Keywords: Monetary policy; Nominal interest rates; Inflation uncertainty;

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References

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  1. Fuhrer, Jeff & Moore, George, 1995. "Inflation Persistence," The Quarterly Journal of Economics, MIT Press, vol. 110(1), pages 127-59, February.
  2. Bernanke, Ben S. & Mihov, Ilian, 1998. "The liquidity effect and long-run neutrality," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 49(1), pages 149-194, December.
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Cited by:
  1. Goodhart, Charles A. E. & Hofmann, Boris, 2003. "The IS curve and the transmission of monetary policy: Is there a puzzle?," ZEI Working Papers B 13-2003, ZEI - Center for European Integration Studies, University of Bonn.
  2. Alistair Dieppe & Jerome Henry & Peter Mc Adam, . "Labour market dynamics in the euro area: A model-based sensitivity analysis," Modeling, Computing, and Mastering Complexity 2003 09, Society for Computational Economics.
  3. Taylor, John B., 1998. "The Robustness and Efficiency of Monetary Policy Rules as Guidelines for Interest Rate Setting by the European Central Bank," Seminar Papers 649, Stockholm University, Institute for International Economic Studies.
  4. Charles Goodhart, 1998. "Central Bankers and Uncertainty," FMG Special Papers sp106, Financial Markets Group.
  5. Gerald Stuber, 2001. "Implications of Uncertainty about Long-Run Inflation and the Price Level," Working Papers 01-16, Bank of Canada.
  6. Juan de Dios Tena & Francesco Giovannoni, 2005. "Market Concentration, Macroeconomic Uncertainty and Monetary Policy," Bristol Economics Discussion Papers 05/576, Department of Economics, University of Bristol, UK.
  7. Nelson, Edward, 2001. "UK Monetary Policy 1972-97: A Guide Using Taylor Rules," CEPR Discussion Papers 2931, C.E.P.R. Discussion Papers.

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