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Assessing Different Drivers of the GreatModeration in the U.S

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  • Efrem Castelnuovo

    ()
    (University of Padua)

Abstract

This paper employs a calibrated new-Keynesian DSGE model to assess the relative importance of two different, potentially important drivers of the Great Moderation in the U.S., namely 'good policy' vs. 'good luck'. The calibrated model is capable to replicate the actual standard deviations of inflation and output. Factual and counterfactual simulations are run in order to gauge the relative importance of the systematic monetary policy vs. the stochastic shocks hitting the economic system in shaping some macroeconomic volatilities. Importantly, under the bad policy scenario sunspots may influence the equilibrium values of the macroeconomic variables of interest, and distortions in the transmission mechanism going from the structural shocks to the variables of interest are allowed for. Our findings support the relevance of both drivers in causing inflation volatility. By contrast, output volatility can hardly be explained by a monetary policy switch like the one occurred in the U.S. at the end of the '70s.

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Bibliographic Info

Paper provided by Dipartimento di Scienze Economiche "Marco Fanno" in its series "Marco Fanno" Working Papers with number 0025.

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Length: 29 pages
Date of creation: Aug 2006
Date of revision:
Handle: RePEc:pad:wpaper:0025

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  1. 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.
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  3. Christopher A. Sims & Tao Zha, 2005. "Were There Regime Switches in U.S. Monetary Policy?," Working Papers 92, Princeton University, Department of Economics, Center for Economic Policy Studies..
  4. Luca Gambetti & Evi Pappa & Fabio Canova, 2008. "The Structural Dynamics of U.S. Output and Inflation: What Explains the Changes?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(2-3), pages 369-388, 03.
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  17. Fabio Canova & Luca Gambetti, 2003. "Structural changes in the US economy: is there a role for monetary policy?," Economics Working Papers 918, Department of Economics and Business, Universitat Pompeu Fabra, revised Apr 2008.
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Cited by:
  1. Giannone, Domenico & Lenza, Michele & Reichlin, Lucrezia, 2008. "Explaining the Great Moderation: it is not the shocks," Working Paper Series 0865, European Central Bank.
  2. Batyra, Anna, 2013. "Are Turbulences of Sargent and Ljungqvist consistent with lower Aggregate Volatility?," GIAM Working Papers 13-2, Galatasaray University Economic Research Center.

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