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Monetary Policy, Oil Shocks, and TFP: Accounting for the Decline in U.S. Volatility

  • Sylvain Leduc

    (Federal Reserve Bank of Philadelphia)

  • Keith Sill

    (Federal Reserve Board)

An equilibrium model is used to assess the quantitative importance of monetary policy for the post-1984 decline in U.S. inflation and output volatility. The principal finding is that monetary policy played a substantial role in reducing inflation volatility, but a small role in reducing real output volatility. The model attributes much of the decline in real output volatility to smaller TFP shocks. We also investigate the pattern of output and inflation volatility under an optimal monetary policy counterfactual. We find that real output volatility would have been somewhat lower, and inflation volatility substantially lower, had monetary policy been set optimally. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1016/j.red.2007.01.005
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Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 10 (2007)
Issue (Month): 4 (October)
Pages: 595-614

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Handle: RePEc:red:issued:05-13
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