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Monetary Policy Regime Switches and Macroeconomic Dynamics

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  • Andrew Foerster

    (Federal Reserve Bank of Kansas City)

Abstract

This paper investigates how different monetary policy regime switching types impact macroeconomic dynamics. Policy switches that either affect the inflation target or the response to deviations of inflation from target leads to different determinacy regions and different output, interest rates, and inflation distributions. With regime switching, the standard Taylor Principle breaks down in multiple ways; satisfying the Principle period-by-period is neither necessary nor sufficient for determinacy. Switching inflation targets primarily affects the economy's level, whereas switching inflation responses affects the variance. Even in periods with fixed monetary policy, expectations of future policy switches can produce different outcomes depending upon the switching type. Monetary authorities with objectives for inflation need to adjust their policy parameters to counteract expectations of future policy switches.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2013 Meeting Papers with number 906.

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Date of creation: 2013
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Handle: RePEc:red:sed013:906

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  1. Stephanie Schmitt-Grohe & Martin Uribe, 2002. "Solving Dynamic General Equilibrium Models Using a Second-Order Approximation to the Policy Function," NBER Technical Working Papers 0282, National Bureau of Economic Research, Inc.
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Cited by:
  1. Marian Vavra, 2013. "Testing for linear and Markov switching DSGE models," Working and Discussion Papers WP 3/2013, Research Department, National Bank of Slovakia.

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