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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. Chang-Jin Kim & Charles Nelson & Jeremy M. Piger, 2003. "The less volatile U.S. economy: a Bayesian investigation of timing, breadth, and potential explanations," Working Papers, Federal Reserve Bank of St. Louis 2001-016, Federal Reserve Bank of St. Louis.
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Cited by:
  1. Batyra, Anna, 2013. "Are Turbulences of Sargent and Ljungqvist consistent with lower Aggregate Volatility?," GIAM Working Papers, Galatasaray University Economic Research Center 13-2, Galatasaray University Economic Research Center.
  2. Domenico Giannone & Michèle Lenza & Lucrezia Reichlin, . "Explaining the great moderation: it is not the shocks," ULB Institutional Repository 2013/6413, ULB -- Universite Libre de Bruxelles.

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