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Noisy information, interest rate shocks and the Great Moderation

  • Mayer, Eric
  • Scharler, Johann

In this paper we evaluate the hypothesis that the Great Moderation is partly the result of a less activist monetary policy. We simulate a New Keynesian model in which the central bank can only observe a noisy estimate of the output gap and find that the less pronounced reaction of the Federal Reserve to output gap fluctuations since 1979 can account for a substantial part of the reduction in the standard deviation of GDP associated with the Great Moderation. Our simulations are consistent with the empirically documented smaller magnitude and impact of interest rate shocks since the early 1980s.

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Article provided by Elsevier in its journal Journal of Macroeconomics.

Volume (Year): 33 (2011)
Issue (Month): 4 ()
Pages: 568-581

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Handle: RePEc:eee:jmacro:v:33:y:2011:i:4:p:568-581
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622617

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