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Asymmetric Expectation Effects of Regime Shifts and the Great Moderation

  • Zheng Liu
  • Daniel F. Waggoner
  • Tao Zha

The possibility of regime shifts in monetary policy can have important effects on rational agents' expectation formation and equilibrium dynamics. In a DSGE model where the monetary policy rule switches between a bad regime that accommodates inflation and a good regime that stabilizes inflation, the expectation effect is asymmetric across regimes. Such an asymmetric effect makes it difficult, but still possible, to generate substantial reductions in the volatilities of inflation and output as the monetary policy switches from the bad regime to the good regime.

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Paper provided by Department of Economics, Emory University (Atlanta) in its series Emory Economics with number 0712.

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Date of creation: Jul 2007
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Handle: RePEc:emo:wp2003:0712
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