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Monetary Policy Regime Switches And Macroeconomic Dynamics

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  • Andrew T. Foerster

Abstract

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.

Suggested Citation

  • Andrew T. Foerster, 2016. "Monetary Policy Regime Switches And Macroeconomic Dynamics," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 57, pages 211-230, February.
  • Handle: RePEc:wly:iecrev:v:57:y:2016:i::p:211-230
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    File URL: http://hdl.handle.net/10.1111/iere.12153
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    Cited by:

    1. Guido Ascari & Anna Florio & Alessandro Gobbi, 2016. "Monetary and Fiscal Policy Interactions: Leeper (1991) Redux," Economics Series Working Papers 788, University of Oxford, Department of Economics.
    2. Smith, A. Lee, 2016. "When does the cost channel pose a challenge to inflation targeting central banks?," European Economic Review, Elsevier, vol. 89(C), pages 471-494.
    3. Qureshi, Irfan, 2015. "Monetary Policy Shifts and Central Bank Independence," MPRA Paper 81646, University Library of Munich, Germany, revised Sep 2017.
    4. LI, XI HAO & Gallegati, Mauro, 2015. "Stock-Flow Dynamic Projection," MPRA Paper 62047, University Library of Munich, Germany.
    5. Dongho Song, 2014. "Bond Market Exposures to Macroeconomic and Monetary Policy Risks," PIER Working Paper Archive 14-017, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
    6. Ascari, Guido & Florio, Anna & Gobbi, Alessandro, 2017. "Controlling inflation with switching monetary and fiscal policies: expectations, fiscal guidance and timid regime changes," Research Discussion Papers 9/2017, Bank of Finland.
    7. repec:fip:fedkrw:15-06 is not listed on IDEAS
    8. Marian Vavra, 2013. "Testing for linear and Markov switching DSGE models," Working and Discussion Papers WP 3/2013, Research Department, National Bank of Slovakia.
    9. Guido Ascari & Anna Florio & Alessandro Gobbi, 2017. "High Trend Inflation and Passive Monetary Detours," DEM Working Papers Series 135, University of Pavia, Department of Economics and Management.
    10. Smith, Andrew Lee, 2015. "When does the cost channel pose a challenge to inflation targeting central banks?," Research Working Paper RWP 15-6, Federal Reserve Bank of Kansas City.

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