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Noisy information, interest rate shocks and the Great Moderation

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  • Mayer, Eric
  • Scharler, Johann

Abstract

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.

Suggested Citation

  • Mayer, Eric & Scharler, Johann, 2011. "Noisy information, interest rate shocks and the Great Moderation," Journal of Macroeconomics, Elsevier, vol. 33(4), pages 568-581.
  • Handle: RePEc:eee:jmacro:v:33:y:2011:i:4:p:568-581
    DOI: 10.1016/j.jmacro.2011.08.004
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    Cited by:

    1. Bofinger, Peter & Debes, Sebastian & Gareis, Johannes & Mayer, Eric, 2011. "Animal spirits and credit spreads in a model with a cost channel," Annual Conference 2011 (Frankfurt, Main): The Order of the World Economy - Lessons from the Crisis 48688, Verein für Socialpolitik / German Economic Association.

    More about this item

    Keywords

    Great Moderation; New Keynesian model; Noisy data;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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