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Evolving U.S. monetary policy and the decline of inflation predictability

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Author Info
Luca Benati () (European Central Bank, Kaiserstraße 29, 60311 Frankfurt, Germany.)
Paolo Surico () (External Monetary Policy Committee Unit, Bank of England, Threadneedle Street, London, EC2R 8AH, United Kingdom.)

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Abstract

Using 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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Paper provided by European Central Bank in its series Working Paper Series with number 824.

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Length: 26 pages
Date of creation: Oct 2007
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Handle: RePEc:ecb:ecbwps:20070824

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Related research
Keywords: Bayesian time-varying VARs; sign restrictions; frequency domain; Great Inflation; predictability.;

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  1. Castelnuovo , Efrem & Greco , Luciano & Raggi, Davide, 2008. "Estimating regime-switching Taylor rules with trend inflation," Research Discussion Papers 20/2008, Bank of Finland. [Downloadable!]
  2. Guglielmo Maria Caporale & Luca Onorante & Paolo Paesani, 2009. "Inflation and Inflation Uncertainty in the Euro Area," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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