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

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  • Silvia Sgherri
  • Tamim Bayoumi

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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Bibliographic Info

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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