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Deconstructing the Art of Central Banking

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  • Mr. Tamim Bayoumi
  • Ms. Silvia Sgherri

Abstract

This paper proposes a markedly different transmission mechanism from monetary policy to the macroeconomy, focusing on how policy changes nominal inertia in the Phillips curve. Using recent theoretical developments, we examine the properties of a small, estimated U.S. monetary model distinguishing four monetary regimes employed since the late 1950s. We find that changes in monetary policy are linked to shifts in nominal inertia, and that these improvements in supply-side flexibility are indeed the main channel through which monetary policy lowers the volatility of inflation and, even more importantly, output.

Suggested Citation

  • Mr. Tamim Bayoumi & Ms. Silvia Sgherri, 2004. "Deconstructing the Art of Central Banking," IMF Working Papers 2004/195, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2004/195
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    Cited by:

    1. Silvia Sgherri, 2008. "Explicit and implicit targets in open economies," Applied Economics, Taylor & Francis Journals, vol. 40(8), pages 969-980.
    2. Mr. Tamim Bayoumi & Ms. Silvia Sgherri, 2004. "Monetary Magic? How the Fed Improved the Flexibility of the U.S. Economy," IMF Working Papers 2004/024, International Monetary Fund.
    3. A. Stevens, 2013. "What inflation developments reveal about the Phillips curve: implications for monetary policy," Economic Review, National Bank of Belgium, issue iii, pages 67-76, December.
    4. 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 - Leibniz Institute for Economic Research at the University of Munich, vol. 6(2), pages 31-35, August.

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    More about this item

    Keywords

    WP; inflation inertia; monetary policy; inflation; rational expectation models; inflation volatility; reaction function; inflation uncertainty; inflation dynamics; monetary policy uncertainty; Output gap; Estimation techniques; Real interest rates;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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