Advanced Search
MyIDEAS: Login to save this paper or follow this series

Monetary Magic? How the Fed Improved the Flexibility of the U.S. Economy

Contents:

Author Info

  • Tamim Bayoumi
  • Silvia Sgherri

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 bring into 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 United States and elsewhere, and tell a subtle and dynamic story of the interaction between monetary policy and the supply side of the economy.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.imf.org/external/pubs/cat/longres.aspx?sk=17128
Download Restriction: no

Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 04/24.

as in new window
Length: 30
Date of creation: 01 Feb 2004
Date of revision:
Handle: RePEc:imf:imfwpa:04/24

Contact details of provider:
Postal: International Monetary Fund, Washington, DC USA
Phone: (202) 623-7000
Fax: (202) 623-4661
Email:
Web page: http://www.imf.org/external/pubind.htm
More information through EDIRC

Order Information:
Web: http://www.imf.org/external/pubs/pubs/ord_info.htm

Related research

Keywords: Monetary policy; Economic models; inflation; aggregate demand; real interest rate; monetary economics; monetary stability; monetary reaction function; monetary policy rules; rational expectations; inflation dynamics; coefficient on inflation; monetary fund; monetary policy reaction function; low inflation; price level; monetary authority; monetary uncertainty; inflationary expectations; reduction in inflation; monetary policy rule; high inflation; monetary control; inflation process; nominal interest rate; monetary stance; real output; monetary policies; neutrality of money; aggregate demand function; monetary models; inflation rates; central bank; rate of inflation; real rates; monetary aggregates; macroeconomic stability; monetary growth; inflation rising; rise in inflation; optimal monetary policy; inflation stabilization; open market operations; transmission of monetary policy; expectations of inflation; monetary policy transparency; monetary transmission; monetary regimes; actual inflation; monetary transmission mechanism; real aggregate demand;

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
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.:
as in new window
  1. Glenn D. Rudebusch, 1995. "Federal Reserve interest rate targeting, rational expectations, and the term structure," Working Papers in Applied Economic Theory, Federal Reserve Bank of San Francisco 95-02, Federal Reserve Bank of San Francisco.
  2. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1997. "Monetary Policy Rules in Practice: Some International Evidence," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1750, C.E.P.R. Discussion Papers.
  3. Tamim Bayoumi & Silvia Sgherri, 2004. "Deconstructing the Art of Central Banking," IMF Working Papers 04/195, International Monetary Fund.
  4. N. Gregory Mankiw & Ricardo Reis, 2001. "Sticky information versus sticky prices: a proposal to replace the New-Keynesian Phillips curve," Proceedings, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco, issue Jun.
  5. Andrew Levin & Volker Wieland & John C. Williams, 1998. "Robustness of Simple Monetary Policy Rules under Model Uncertainty," NBER Working Papers 6570, National Bureau of Economic Research, Inc.
  6. Evans, Martin, 1991. "Discovering the Link between Inflation Rates and Inflation Uncertainty," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 23(2), pages 169-84, May.
  7. Hyun Song Shin & Jeffery D. Amato, 2003. "Public and Private Information in Monetary Policy Models," Computing in Economics and Finance 2003, Society for Computational Economics 38, Society for Computational Economics.
  8. Kim, Chang-Jin, 1993. "Sources of Monetary Growth Uncertainty and Economic Activity: The Time-Varying-Parameter Model with Heteroskedastic Disturbances," The Review of Economics and Statistics, MIT Press, vol. 75(3), pages 483-92, August.
  9. 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, Elsevier, vol. 17(4), pages 531-553, July.
  10. José Viñals, 2001. "Monetary Policy Issues in a Low Inflation Environment," Banco de Espa�a Working Papers 0107, Banco de Espa�a.
  11. Viñals, José, 2001. "Monetary Policy Issues in a Low Inflation Environment," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2945, C.E.P.R. Discussion Papers.
  12. Laurence Ball, 2000. "Near-Rationality and Inflation in Two Monetary Regimes," Economics Working Paper Archive, The Johns Hopkins University,Department of Economics 435, The Johns Hopkins University,Department of Economics.
  13. Bennett T. McCallum, 2001. "Should Monetary Policy Respond Strongly to Output Gaps?," NBER Working Papers 8226, National Bureau of Economic Research, Inc.
  14. Peter Isard & Douglas Laxton & Ann-Charlotte Eliasson, 1999. "Simple Monetary Policy Rules Under Model Uncertainty," Computing in Economics and Finance 1999, Society for Computational Economics 841, Society for Computational Economics.
  15. Olivier Blanchard & John Simon, 2001. "The Long and Large Decline in U.S. Output Volatility," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 32(1), pages 135-174.
  16. repec:nbr:nberre:0126 is not listed on IDEAS
  17. Robert King & Alexander L. Wolman, 1999. "What Should the Monetary Authority Do When Prices Are Sticky?," NBER Chapters, National Bureau of Economic Research, Inc, in: Monetary Policy Rules, pages 349-404 National Bureau of Economic Research, Inc.
  18. Gertler, Mark, 1982. "Imperfect Information and Wage Inertia in the Business Cycle," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 90(5), pages 967-87, October.
  19. John M. Roberts, 1998. "Inflation expectations and the transmission of monetary policy," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 1998-43, Board of Governors of the Federal Reserve System (U.S.).
  20. Nelson, Charles R. & Plosser, Charles I., 1982. "Trends and random walks in macroeconmic time series : Some evidence and implications," Journal of Monetary Economics, Elsevier, Elsevier, vol. 10(2), pages 139-162.
  21. Clark, Peter & Laxton, Douglas & Rose, David, 2001. "An Evaluation of Alternative Monetary Policy Rules in a Model with Capacity Constraints," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 33(1), pages 42-64, February.
  22. Jean Boivin & Marc Giannoni, 2002. "Assessing changes in the monetary transmission mechanism: a VAR approach," Economic Policy Review, Federal Reserve Bank of New York, Federal Reserve Bank of New York, issue May, pages 97-111.
  23. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1908, C.E.P.R. Discussion Papers.
  24. Orphanides, Athanasios, 2003. "Monetary policy evaluation with noisy information," Journal of Monetary Economics, Elsevier, Elsevier, vol. 50(3), pages 605-631, April.
  25. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, Elsevier, vol. 4(2), pages 103-124, April.
  26. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 88(1), pages 1-23, February.
  27. repec:fth:baesse:0107 is not listed on IDEAS
  28. Julio Rotemberg & Michael Woodford, 1997. "An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy," NBER Chapters, National Bureau of Economic Research, Inc, in: NBER Macroeconomics Annual 1997, Volume 12, pages 297-361 National Bureau of Economic Research, Inc.
  29. Chang-Jin Kim & Charles R. Nelson, 1999. "State-Space Models with Regime Switching: Classical and Gibbs-Sampling Approaches with Applications," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262112388, December.
  30. Harvey, Andrew & Ruiz, Esther & Sentana, Enrique, 1992. "Unobserved component time series models with Arch disturbances," Journal of Econometrics, Elsevier, Elsevier, vol. 52(1-2), pages 129-157.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Pau Rabanal, 2004. "Monetary Policy Rules and the U.S. Business Cycle," IMF Working Papers 04/164, International Monetary Fund.
  2. Benedetto Molinari, 2014. "Sticky information and inflation persistence: evidence from the U.S. data," Empirical Economics, Springer, Springer, vol. 46(3), pages 903-935, May.
  3. Adam Posen & Daniel Popov Gould, 2006. "Has EMU had any Impact on the Degree of Wage Restraint?," CESifo Working Paper Series 1783, CESifo Group Munich.
  4. Benedetto Molinari, 2010. "Sticky Information and Inflation Persistence: Evidence from U.S. Data," Working Papers 10.09, Universidad Pablo de Olavide, Department of Economics.
  5. Otmar Issing, 2005. "Speeding up European Reform: A Master Plan for the Lisbon Process - The Implementation of the Lisbon Agenda: A political priority," CESifo Forum, Ifo Institute for Economic Research at the University of Munich, Ifo Institute for Economic Research at the University of Munich, vol. 6(2), pages 31-35, 08.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:imf:imfwpa:04/24. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jim Beardow) or (Hassan Zaidi).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.