Evolving U.S. Monetary Policy and The Decline of Inflation Predictability
Based on a structural VAR with time-varying parameters and stochastic volatility for the post-WWII U.S., we document a negative correlation between the evolution of the long-run coefficient on inflation in the structural monetary rule and the evolution of the persistence and predictability of inflation relative to a trend component. Using an estimated sticky-price model, we show that a more aggressive policy stance towards inflation causes a decline in inflation predictability. (JEL: E37, E52, E58) (c) 2008 by the European Economic Association.
Volume (Year): 6 (2008)
Issue (Month): 2-3 (04-05)
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