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Monetary Policy and Indeterminacy after the 2001 Slump

Author

Listed:
  • Firmin Doko Tchatoka

    () (School of Economics, University of Adelaide)

  • Nicolas Groshenny

    () (School of Economics, University of Adelaide)

  • Qazi Haque

    () (School of Economics, University of Adelaide)

  • Mark Weder

    () (School of Economics, University of Adelaide)

Abstract

This paper estimates a New Keynesian model of the U.S. economy over the period following the 2001 slump, a period for which the adequacy of monetary policy is intensely debated. We find that only when measuring inflation with core PCE does monetary policy appear to have been reasonable and sufficiently active to rule out indeterminacy. We then relax the assumption that inflation in the model is measured by a single indicator and re-formulate the artificial economy as a factor model where the theoryÂ’s concept of inflation is the common factor to the empirical inflation series. CPI and PCE provide better indicators of the latent concept while core PCE is less informative. Finally, we estimate an economy that distinguishes between core and headline inflation rates. This model comfortably rules out indeterminacy.

Suggested Citation

  • Firmin Doko Tchatoka & Nicolas Groshenny & Qazi Haque & Mark Weder, 2016. "Monetary Policy and Indeterminacy after the 2001 Slump," School of Economics Working Papers 2016-18, University of Adelaide, School of Economics.
    • Handle: RePEc:adl:wpaper:2016-18
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    Cited by:

    1. Hirose, Yasuo, 2020. "An Estimated Dsge Model With A Deflation Steady State," Macroeconomic Dynamics, Cambridge University Press, vol. 24(5), pages 1151-1185, July.
    2. Castelnuovo, Efrem & Pellegrino, Giovanni, 2018. "Uncertainty-dependent effects of monetary policy shocks: A new-Keynesian interpretation," Journal of Economic Dynamics and Control, Elsevier, vol. 93(C), pages 277-296.
    3. Qazi Haque, 2017. "Monetary Policy, Target Inflation and the Great Moderation: An Empirical Investigation," School of Economics Working Papers 2017-10, University of Adelaide, School of Economics.
    4. Qazi Haque & Nicolas Groshenny & Mark Weder, 2018. "Do We Really Know that U.S. Monetary Policy was Destabilizing in the 1970s?," School of Economics Working Papers 2018-03, University of Adelaide, School of Economics.
    5. Yasuo Hirose & Takushi Kurozumi & Willem Van Zandweghe, 2020. "Monetary Policy and Macroeconomic Stability Revisited," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 37, pages 255-274, July.
    6. Belongia, Michael T. & Ireland, Peter N., 2016. "The evolution of U.S. monetary policy: 2000–2007," Journal of Economic Dynamics and Control, Elsevier, vol. 73(C), pages 78-93.
    7. Qazi Haque, 2017. "Monetary Policy, Inflation Target and the Great Moderation: An Empirical Investigation," School of Economics Working Papers 2017-13, University of Adelaide, School of Economics.

    More about this item

    Keywords

    Indeterminacy; Taylor Rules; Great Deviation;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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