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Endogenous Monetary Policy Regimes and the Great Moderation

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  • Galvão, Ana Beatriz C
  • Marcellino, Massimiliano

Abstract

This paper contributes to the literature on the changing transmission mechanism of monetary policy by introducing a model whose parameter evolution explicitly depends on the conduct of monetary policy. We find that the model fits the data well, in particular when complemented with an estimated break around 1985 that could be associated with the re-gained credibility of the central bank. The responses of output and inflation to policy shocks change not only because of the break in 1985 but also according to the monetary policy stance: policy shocks have stronger negative effects when policy is tight. There is also evidence in favour of large changes in the volatility of the output equation, but not of inflation. A set of counterfactual experiments indicate that good policy and good luck contributed to the "great moderation", but neither of them can fully explain it. A more general variation in the model dynamics underlying the shock transmission mechanism is required.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7827.

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Date of creation: May 2010
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Handle: RePEc:cpr:ceprdp:7827

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Keywords: great moderation; impulse responses; monetary policy; time-varying models;

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  1. Boivin, Jean & Kiley, Michael T. & Mishkin, Frederic S., 2010. "How Has the Monetary Transmission Mechanism Evolved Over Time?," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 8, pages 369-422 Elsevier.
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Cited by:
  1. Eickmeier, Sandra & Lemke, Wolfgang & Marcellino, Massimiliano, 2011. "Classical time-varying FAVAR models - estimation, forecasting and structural analysis," Discussion Paper Series 1: Economic Studies 2011,04, Deutsche Bundesbank, Research Centre.
  2. Jouchi Nakajima & Mike West, 2013. "Bayesian Analysis of Latent Threshold Dynamic Models," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 31(2), pages 151-164, April.
  3. Jolejole-Foreman, Maria Christina & Mallory, Mindy L. & Baylis, Katherine R., 2013. "Impact of Wheat and Rice Export Ban on Indian Market Integration," 2013 Annual Meeting, August 4-6, 2013, Washington, D.C. 150595, Agricultural and Applied Economics Association.

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