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Deconstructing the Art of Central Banking

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  • Bayoumi, Tamim
  • Sgherri, Silvia

Abstract

This Paper proposes a markedly different transmission from monetary policy to the macroeconomy, focusing on how policy changes nominal inertia in the Phillips curve. Using recent theoretical developments, we examine the properties of a small, estimated US monetary model distinguishing four monetary regimes since the late 1950s. We find that changes in monetary policy are linked to shifts in nominal inertia, and that these improvements in supply-side flexibility are indeed the main channel through which monetary policy lowers the volatility of inflation and, even more importantly, output.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4675.

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Date of creation: Oct 2004
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Handle: RePEc:cpr:ceprdp:4675

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Keywords: inflation; monetary policy; rational expectation models;

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Citations

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Cited by:
  1. Otmar Issing, 2005. "Speeding up European Reform: A Master Plan for the Lisbon Process - The Implementation of the Lisbon Agenda: A political priority," CESifo Forum, Ifo Institute for Economic Research at the University of Munich, vol. 6(2), pages 31-35, 08.
  2. Tamim Bayoumi & Silvia Sgherri, 2004. "Monetary Magic? How the Fed Improved the Flexibility of the U.S. Economy," IMF Working Papers 04/24, International Monetary Fund.
  3. Silvia Sgherri, 2008. "Explicit and implicit targets in open economies," Applied Economics, Taylor & Francis Journals, vol. 40(8), pages 969-980.

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