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Monetary policy regimes and beliefs

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  • David Andolfatto
  • Paul Gomme

Abstract

Revised. This paper investigates the role of beliefs over monetary policy in propagating the effects of monetary policy shocks within the context of a dynamic, stochastic general equilibrium model. In this model, monetary policy periodically switches between low- and high-money-growth regimes. When individuals cannot observe the regime directly, they must draw inferences over regime type based on historical money growth rates. The authors show that for an empirically plausible money growth process, beliefs evolve slowly in the wake of a regime change. As a result, their model is able to capture some of the observed persistence of real and nominal variables following such a regime change.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Cleveland in its series Working Paper with number 9905.

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Date of creation: 2001
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Handle: RePEc:fip:fedcwp:9905

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Keywords: Monetary policy;

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  1. Cooley, Thomas F & Hansen, Gary D, 1989. "The Inflation Tax in a Real Business Cycle Model," American Economic Review, American Economic Association, American Economic Association, vol. 79(4), pages 733-48, September.
  2. Michael Dotsey & Peter Ireland, 1993. "Liquidity effects and transactions technologies," Working Paper, Federal Reserve Bank of Richmond 93-01, Federal Reserve Bank of Richmond.
  3. Backus, David & Driffill, John, 1985. "Inflation and Reputation," American Economic Review, American Economic Association, American Economic Association, vol. 75(3), pages 530-38, June.
  4. Cook, David, 1999. "The liquidity effect and money demand," Journal of Monetary Economics, Elsevier, Elsevier, vol. 43(2), pages 377-390, April.
  5. Coleman, Wilbur John, II, 1991. "Equilibrium in a Production Economy with an Income Tax," Econometrica, Econometric Society, Econometric Society, vol. 59(4), pages 1091-1104, July.
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  7. Ruge-Murcia, Francisco J, 1995. "Credibility and Changes in Policy Regime," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 103(1), pages 176-208, February.
  8. Cooley, Thomas F. & Quadrini, Vincenzo, 1999. "A neoclassical model of the Phillips curve relation," Journal of Monetary Economics, Elsevier, Elsevier, vol. 44(2), pages 165-193, October.
  9. Romer, Christina D. & Romer, David H., 1989. "Does Monetary Policy Matter? A New Test in the Spirit of Friedman and Schwartz," Department of Economics, Working Paper Series, Department of Economics, Institute for Business and Economic Research, UC Berkeley qt5h07k8vf, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  10. Lawrence J. Christiano & Christopher J. Gust, 2000. "The Expectations Trap Hypothesis," NBER Working Papers 7809, National Bureau of Economic Research, Inc.
  11. Lucas, Robert Jr., 1990. "Liquidity and interest rates," Journal of Economic Theory, Elsevier, Elsevier, vol. 50(2), pages 237-264, April.
  12. Fuerst, Timothy S., 1992. "Liquidity, loanable funds, and real activity," Journal of Monetary Economics, Elsevier, Elsevier, vol. 29(1), pages 3-24, February.
  13. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, Econometric Society, vol. 57(2), pages 357-84, March.
  14. Cukierman, Alex & Meltzer, Allan H, 1986. "A Theory of Ambiguity, Credibility, and Inflation under Discretion and Asymmetric Information," Econometrica, Econometric Society, Econometric Society, vol. 54(5), pages 1099-1128, September.
  15. Backus, David & Driffill, John, 1985. "Rational Expectations and Policy Credibility Following a Change in Regime," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 52(2), pages 211-21, April.
  16. Barro, Robert J. & Gordon, David B., 1983. "Rules, discretion and reputation in a model of monetary policy," Journal of Monetary Economics, Elsevier, Elsevier, vol. 12(1), pages 101-121.
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