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Monetary Magic? How the Fed Improved the Supply Side of the Economy

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Author Info
Silvia Sgherri
Tamim Bayoumi

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Abstract

Extending recent theoretical contributions on sources of inflation inertia, we argue that monetary uncertainty accounts for sluggish expectations adjustment to nominal disturbances. Estimating a model in which rational individuals learn over time about shifts in U.S. 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 U.S. and elsewhere, and tell a subtle and dynamic story of the interaction between monetary policy and the supply-side of the econo

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Paper provided by Econometric Society in its series Econometric Society 2004 Far Eastern Meetings with number 422.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:feam04:422

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Keywords: Inflation dynamics Monetary policy Kalman filter

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Find related papers by JEL classification:
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
C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation

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  4. Fuhrer, Jeffrey C. & Hooker, Mark A., 1993. "Learning about monetary regime shifts in an overlapping wage contract model," Journal of Economic Dynamics and Control, Elsevier, vol. 17(4), pages 531-553, July. [Downloadable!] (restricted)
    Other versions:
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  19. repec:cup:macdyn:v:4:y:2000:i:4:p:448-66 is not listed on IDEAS
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    Other versions:
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