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Monetary Policy and Macroeconomic Stability Revisited

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  • Hirose, Yasuo

    (Keio University)

  • Van Zandweghe, Willem

    (Federal Reserve Bank of Cleveland)

  • Kurozumi, Takushi

    (Bank of Japan)

Abstract

A large literature has established that the Fed’ change from a passive to an active policy response to inflation led to US macroeconomic stability after the Great Inflation of the 1970s. This paper revisits the literature’s view by estimating a generalized New Keynesian model using a full-information Bayesian method that allows for equilibrium indeterminacy and adopts a sequential Monte Carlo algorithm. The model empirically outperforms canonical New Keynesian models that confirm the literature’s view. Our estimated model shows an active policy response to inflation even during the Great Inflation. More importantly, a more active policy response to inflation alone does not suffice for explaining the US macroeconomic stability, unless it is accompanied by a change in either trend inflation or policy responses to the output gap and output growth. This extends the literature by emphasizing the importance of the changes in other aspects of monetary policy in addition to its response to inflation.

Suggested Citation

  • Hirose, Yasuo & Van Zandweghe, Willem & Kurozumi, Takushi, 2019. "Monetary Policy and Macroeconomic Stability Revisited," Working Papers 191400, Federal Reserve Bank of Cleveland.
  • Handle: RePEc:fip:fedcwq:191400
    DOI: 10.26509/frbc-wp-201914
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    File URL: https://doi.org/10.26509/frbc-wp-201914
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    References listed on IDEAS

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    Cited by:

    1. Arias, Jonas E. & Ascari, Guido & Branzoli, Nicola & Castelnuovo, Efrem, 2017. "Positive Trend Inflation And Determinacy In A Medium-Sized New Keynesian Model," Working Papers 17-16, Federal Reserve Bank of Philadelphia.
    2. 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.
    3. Yasufumi Gemma & Takushi Kurozumi & Mototsugu Shintani, 2017. "Trend Inflation and Evolving Inflation Dynamics: A Bayesian GMM Analysis of the Generalized New Keynesian Phillips Curve," IMES Discussion Paper Series 17-E-10, Institute for Monetary and Economic Studies, Bank of Japan.
    4. Yasuo Hirose, 2014. "An Estimated DSGE Model with a Deflation Steady State," UTokyo Price Project Working Paper Series 025, University of Tokyo, Graduate School of Economics.
    5. Qureshi, Irfan, 2018. "Money Aggregates and Determinacy : A Reinterpretation of Monetary Policy During the Great Inflation," The Warwick Economics Research Paper Series (TWERPS) 1156, University of Warwick, Department of Economics.
    6. 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.
    7. 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.
    8. repec:fip:fedkmb:00064 is not listed on IDEAS
    9. Jonas E. Arias & Guido Ascari & Nicola Branzoli & Efrem Castelnuovo, 2018. "Positive Trend Inflation and Determinacy in a Medium-Sized New Keynesian Model," CESifo Working Paper Series 7122, CESifo Group Munich.
    10. Hashmat Khan & Louis Phaneuf & Jean Gardy Victor, 2018. "Rules-Based Monetary Policy and the Threat of Indeterminacy When Trend Inflation is Low," Carleton Economic Papers 18-08, Carleton University, Department of Economics, revised 08 Mar 2019.
    11. Takefumi Yamazaki, 2018. "Financial friction sources in emerging economies: Structural estimation of sovereign default models," Discussion papers ron303, Policy Research Institute, Ministry of Finance Japan.

    More about this item

    Keywords

    Monetary policy; Great Inflation; Indeterminacy; Trend inflation; Sequential Monte Carlo;

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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