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Monetary Policy Regime Switches And Macroeconomic Dynamics

Listed author(s):
  • Andrew T. Foerster

This article considers the determinacy and distributional consequences of regime switching in monetary policy. Although switching in the inflation target does not affect determinacy, switches in the inflation response can cause indeterminacy. Satisfying the Taylor principle period by period is neither necessary nor sufficient for determinacy when inflation responses switch; indeterminacy can arise if monetary policy responds too aggressively to inflation in the active regime. Inflation target switches primarily impact the level of inflation, whereas inflation response switches primarily impact the volatility. Expecting an inflation target switch has minor effects on volatility, whereas expecting an inflation response switch raises volatility more substantially.

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File URL: http://hdl.handle.net/10.1111/iere.12153
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Article provided by Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association in its journal International Economic Review.

Volume (Year): 57 (2016)
Issue (Month): (02)
Pages: 211-230

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Handle: RePEc:wly:iecrev:v:57:y:2016:i::p:211-230
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