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Evolving U.S. monetary policy and the decline of inflation predictability

  • Benati, Luca
  • Surico, Paolo

Using a structural VAR with time-varying parameters and stochastic volatility on post-WWII U.S. data, we document a striking negative correlation between the evolution of the long-run coefficient on inflation in the monetary rule and the evolution of the persistence and predictability of inflation relative to a trend component. Using a standard sticky-price model, we show that a more aggressive policy stance towards inflation causes a decline in inflation predictability, providing a possible interpretation for the findings of the structural VAR. JEL Classification: E37, E52, E58

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Paper provided by European Central Bank in its series Working Paper Series with number 0824.

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Date of creation: Oct 2007
Date of revision:
Handle: RePEc:ecb:ecbwps:20070824
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