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Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory

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  • Richard Clarida
  • Jordi Gali
  • Mark Gertler

Abstract

We estimate a forward-looking monetary policy reaction function for the postwar US economy, pre- and post-October 1979. Our results point to substantial differences in the estimated rule across periods. In particular, interest rate policy in the Volcker-Greenspan period appears to have been much more sensitive to changes in expected inflation than in the pre-Volcker period. We then compare some of the implications of the estimated rules for equilibrium properties of inflation and output, using a simple macroeconomic model. The pre-Volcker rule is shown to be consistent with the possibility of persistent, self-fulfilling fluctuations in inflation and output. In contrast, the Volcker-Greenspan rule is stabilizing.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6442.

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Date of creation: Mar 1998
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Publication status: published as Quarterly Journal of Economics, Vol. CXV, issue 1 (2000): 147-180.
Handle: RePEc:nbr:nberwo:6442

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  1. Svensson, L-E-O, 1996. "Inflation Forecast Targeting : Implementaing and Monitoring Inflation Targets," Papers 615, Stockholm - International Economic Studies.
  2. repec:nbr:nberre:0126 is not listed on IDEAS
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  18. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July.
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  1. 'A Century of U.S. Central Banking: Goals, Frameworks, Accountability'
    by Mark Thoma in Economist's View on 2013-07-10 13:48:26
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