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Deconstructing the Art of Central Banking

  • Bayoumi, Tamim
  • Sgherri, Silvia

This Paper proposes a markedly different transmission from monetary policy to the macroeconomy, focusing on how policy changes nominal inertia in the Phillips curve. Using recent theoretical developments, we examine the properties of a small, estimated US monetary model distinguishing four monetary regimes since the late 1950s. We find that changes in monetary policy are linked to shifts in nominal inertia, and that these improvements in supply-side flexibility are indeed the main channel through which monetary policy lowers the volatility of inflation and, even more importantly, output.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4675.

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Date of creation: Oct 2004
Handle: RePEc:cpr:ceprdp:4675
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