The Inflation-Output Variability Tradeoff and Monetary Policy: Evidence from a GARCH Model
This paper empirically investigates the Taylor curve volatility tradeoff in light of the stochastic behavior of the conditional variances of output and inflation. Stressing structural instability between periods before and after the 1979–1982 monetary policy regime change, I implement a bivariate generalized autoregressive conditional heteroskedasticity model to capture the output-inflation variability tradeoff and to explore the plausible impact of a change in the federal funds rate on the two conditional volatilities. I further evaluate the impacts of anticipated and unanticipated policy actions measured by two alternative policy reaction functions—one from a vector-autoregression-based reduced-form equation and another based on the Taylor rule. In addition to showing a volatility tradeoff relationship, the empirical model reveals different magnitudes of policy effects on output and inflation volatility across the two sample periods.
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Volume (Year): 69 (2002)
Issue (Month): 1 (July)
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