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Learning and Monetary Policy Shifts

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  • Frank Schorfheide

    (University of Pennsylvania)

Abstract

This paper estimates a dynamic stochastic equilibrium model in which monetary policy follows a nominal interest rate rule that is subject to regime switches in the target ination rate. Two specifications are considered: agents know the current state of monetary policy (full information) and agents use Bayesian updating to infer the policy regime (learning). First, our policy regime estimates are consistent with the view that policy was marked by a shift to a high-inflation regime in the early 1970's which ended with Volcker's stabilization policy. Second, while Bayesian posterior odds favor the full-information version of the model, the fall of interest rates, actual and expected inflation in the early 1980's is better captured by the delayed response of the learning specication. Third, monetary policy shocks of up to two standard deviations essentially do not trigger the Bayesian learning mechanism. Yet due to non-linearities, interventions that lead to small initial interest rate changes may be associated with much larger effects on output and inflation than under full information. (Copyright: Elsevier)

Suggested Citation

  • Frank Schorfheide, 2005. "Learning and Monetary Policy Shifts," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(2), pages 392-419, April.
  • Handle: RePEc:red:issued:v:8:y:2005:i:2:p:392-419
    DOI: 10.1016/j.red.2005.01.001
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    More about this item

    Keywords

    Bayesian Econometrics; Learning; Monetary DSGE Models;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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