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Monetary policy, output composition and the Great Moderation

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Benoît Mojon

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Abstract

This paper shows how US monetary policy contributed to the drop in the volatility of US output fluctuations and to the decoupling of household investment from the business cycle. I estimate a model of household investment, an aggregate of non durable consumption and corporate sector investment, inflation and a short-term interest rate. Subsets of the models' parameters can vary along independent Markov Switching processes. ; A specific form of switches in the monetary policy regimes, i.e. changes in the size of monetary policy shocks, affect both the correlation between output components and their volatility. A regime of high volatility in monetary policy shocks, that spanned from 1970 to 1975 and from 1979 to 1984 is characterized by large monetary policy shocks contributions to GDP components and by a high correlation of household investment to the business cycle. This contrasts with the 1960's, the 1976 to 1979 period and the post 1984 era where monetary policy shocks have little impact on the fluctuations of real output.

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Paper provided by Federal Reserve Bank of Chicago in its series Working Paper Series with number WP-07-07.

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Date of creation: 2007
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Handle: RePEc:fip:fedhwp:wp-07-07

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Keywords: Monetary policy ; Gross domestic product ; Business cycles;

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This paper has been announced in the following NEP Reports: References listed on IDEAS
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Domenico Giannone & Michele Lenza & Lucrezia Reichlin, 2008. "Explaining the Great Moderation - it is not the shocks," Working Paper Series 865, European Central Bank. [Downloadable!]
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  2. Frank Smets, 2007. "Housing is the business cycle: commentary," Proceedings, Federal Reserve Bank of Kansas City, pages 235-243. [Downloadable!]
  3. Castelnuovo , Efrem & Greco , Luciano & Raggi, Davide, 2008. "Estimating regime-switching Taylor rules with trend inflation," Research Discussion Papers 20/2008, Bank of Finland. [Downloadable!]
  4. Marek Jarocinski & Frank Smets, 2008. "House prices and the stance of monetary policy," Working Paper Series 891, European Central Bank. [Downloadable!]
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