Evolving U.S. monetary policy and the decline of inflation predictability
AbstractUsing a structural VAR with time-varying parameters and stochastic volatility on post-WWII U.S. data, we document a striking negative correlation between the evolution of the long-run coefficient on inflation in the monetary rule and the evolution of the persistence and predictability of inflation relative to a trend component. Using a standard sticky-price model, we show that a more aggressive policy stance towards inflation causes a decline in inflation predictability, providing a possible interpretation for the findings of the structural VAR. JEL Classification: E37, E52, E58
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Bibliographic InfoPaper provided by European Central Bank in its series Working Paper Series with number 0824.
Date of creation: Oct 2007
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Other versions of this item:
- Luca Benati & Paolo Surico, 2008. "Evolving U.S. Monetary Policy and The Decline of Inflation Predictability," Journal of the European Economic Association, MIT Press, vol. 6(2-3), pages 634-646, 04-05.
- E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-11-17 (All new papers)
- NEP-CBA-2007-11-17 (Central Banking)
- NEP-MAC-2007-11-17 (Macroeconomics)
- NEP-MON-2007-11-17 (Monetary Economics)
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