Monetary Magic? How the Fed Improved the Flexibility of the Economy

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Monetary Magic? How the Fed Improved the Flexibility of the Economy

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Bayoumi, Tamim
Sgherri, Silvia

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Abstract

Extending recent theoretical contributions on sources of inflation inertia, we argue that monetary policy uncertainty helps determine the sluggish adjustment of expectations to nominal disturbances. Estimating a model in which rational individuals learn over time about shifts in US monetary policy and the Phillips curve, we find strong evidence that this link exists. These results question the standard approach for evaluating monetary rules by assuming unchanged private sector responses, help clarify the role of monetary stability in reducing output variability in the US and elsewhere, and tell a subtle and dynamic story of the interaction between monetary policy and the supply-side of the economy.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4696.

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Date of creation: Oct 2004
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Handle: RePEc:cpr:ceprdp:4696

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Find related papers by JEL classification:
C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

This paper has been announced in the following NEP Reports:

NEP-ALL-2005-02-13 (All new papers)
NEP-CBA-2005-02-13 (Central Banking)
NEP-MAC-2005-02-13 (Macroeconomics)
NEP-MON-2005-02-13 (Monetary Economics)

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

Marco Lombardi & Silvia Sgherri, 2007. "(Un)naturally Low? Sequential Monte Carlo Tracking of the US Natural Interest Rate," DNB Working Papers 142, Netherlands Central Bank, Research Department. [Downloadable!]
Other versions:
- Marco J. Lombardi & Silvia Sgherri, 2007. "(Un)naturally low? Sequential Monte Carlo tracking of the US natural interest rate," Working Paper Series 794, European Central Bank. [Downloadable!]
Philippe D Karam & Douglas Laxton & Andrew Berg, 2006. "A Practical Model-Based Approach to Monetary Policy Analysis--Overview," IMF Working Papers 06/80, International Monetary Fund. [Downloadable!]

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This page was last updated on 2009-11-25.

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