Monetary Policy, Nominal Interest Rates, and Long-Horizon Inflation Uncertainty
Empirical evidence presented in this paper shows that the predictability of inflation at long horizons varies considerably across countries. Both simple theory and empirical evidence suggest that the crucial factor is the extent to which systematic monetary policy succeeds in preventing a unit root in inflation. The mechanism by which it does this appears however to be complicated by strong empirical evidence that nominal as well as real interest rates have real effects, which implies that monetary policy need not be so vigorous in reactions to inflation. This helps to explain why inflation rates in the US and (especially) Germany have been relatively predictable, despite monetary policy rules which appear to have been barely stabilising. The paper also presents tentative evidence that the power of nominal interest rate effects is inversely related to long-horizon inflation uncertainty, and hence ultimately uncertainty about monetary policy. Copyright 2002 by Scottish Economic Society.
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Volume (Year): 49 (2002)
Issue (Month): 1 (February)
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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Jeff Fuhrer & George Moore, 1993.
Finance and Economics Discussion Series
93-17, Board of Governors of the Federal Reserve System (U.S.).
- Fuhrer, Jeff & Moore, George, 1995. "Inflation Persistence," The Quarterly Journal of Economics, MIT Press, vol. 110(1), pages 127-59, February.
- Jeff Fuhrer & George Moore, 1993. "Inflation persistence," Proceedings, Board of Governors of the Federal Reserve System (U.S.).
- Jeff Fuhrer & George Moore, 1993. "Inflation persistence," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
- Bernanke, Ben S. & Mihov, Ilian, 1998.
"The liquidity effect and long-run neutrality,"
Carnegie-Rochester Conference Series on Public Policy,
Elsevier, vol. 49(1), pages 149-194, December.
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