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Monetary Policy, Inflation and Unemployment In Defense of the Federal Reserve

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  • Nicolas Groshenny

Abstract

To what extent did deviations from the Taylor rule between 2002 and 2006 help to promote price stability and maximum sustainable employment? To address that question, this paper estimates a New Keynesian model with unemployment and performs a counterfactual experiment where monetary policy strictly follows a Taylor rule over the period 2002:Q1 - 2006:Q4. The paper finds that such a policy would have generated a sizeable increase in unemployment and resulted in an undesirably low rate of inflation. Around mid-2004, when the counterfactual deviates the most from the actual series, the model indicates that the probability of an unemployment rate greater than 8 percent would have been as high as 80 percent, while the probability of an inflation rate above 1 percent would have been close to zero.

Suggested Citation

  • Nicolas Groshenny, 2010. "Monetary Policy, Inflation and Unemployment In Defense of the Federal Reserve," CAMA Working Papers 2010-37, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  • Handle: RePEc:een:camaaa:2010-37
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    File URL: https://cama.crawford.anu.edu.au/sites/default/files/publication/cama_crawford_anu_edu_au/2017-03/37_groshenny_2010.pdf
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Pelin Ilbas & Øistein Røisland & Tommy Sveen, 2013. "The influence of the Taylor rule on US monetary policy," Working Paper 2013/04, Norges Bank.
    2. Doko Tchatoka, Firmin & Groshenny, Nicolas & Haque, Qazi & Weder, Mark, 2017. "Monetary policy and indeterminacy after the 2001 slump," Journal of Economic Dynamics and Control, Elsevier, vol. 82(C), pages 83-95.
    3. Verónica Acurio Vásconez, 2015. "Oil and Unemployment in a New-Keynesian Model," Documents de travail du Centre d'Economie de la Sorbonne 15043, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
    4. repec:wly:japmet:v:31:y:2016:i:7:p:1197-1214 is not listed on IDEAS
    5. Francesco Furlanetto & Nicolas Groshenny, "undated". "Mismatch Shocks and Unemployment During the Great Recession," School of Economics Working Papers 2015-14, University of Adelaide, School of Economics.
    6. Francesco Furlanetto & Nicolas Groshenny, 2012. "Matching efficiency and business cycle fluctuations," Working Paper 2012/07, Norges Bank.

    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection

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