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Monetary policy regimes and beliefs

Author

Listed:
  • David Andolfatto
  • Paul Gomme

Abstract

Recent monetary history has been characterized by monetary authorities that appear to shift periodically between distinct policy regimes associated with higher or lower average rates of money creation. As policy regimes are not directly observable and as the rate of monetary expansion varies for reasons other than regime changes, the general public must form beliefs over current monetary policy based on historical realizations of money growth rates. Depending on the parameters governing the behaviour of monetary policy, beliefs (and therefore inflation forecasts) may evolve very slowly in the wake of actual regime changes, thereby exacerbating the costs of a disinflation policy. The quantitative importance of slowly adjusting beliefs is evaluated in the context of a computable general equilibrium model.

Suggested Citation

  • David Andolfatto & Paul Gomme, 1997. "Monetary policy regimes and beliefs," Discussion Paper / Institute for Empirical Macroeconomics 118, Federal Reserve Bank of Minneapolis.
  • Handle: RePEc:fip:fedmem:118
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    Citations

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    Cited by:

    1. Michael R. Pakko, 1998. "Shoe-leather costs of inflation and policy credibility," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 37-50.
    2. Chan Guk Huh & Kevin J. Lansing, 1998. "Federal Reserve credibility and inflation scares," Economic Review, Federal Reserve Bank of San Francisco, pages 3-16.
    3. Hendry, Scott & Zhang, Guang-Jia, 2001. "Liquidity Effects and Market Frictions," Journal of Macroeconomics, Elsevier, vol. 23(2), pages 153-176, April.
    4. Keith Sill & Jeffrey M. Wrase, 1999. "Solving and simulating a simple open-economy model with Markov-switching driving processes and rational learning," Working Papers 99-14, Federal Reserve Bank of Philadelphia, revised 1999.
    5. Keith Sill & Jeffrey M. Wrase, 1999. "Exchange rates and monetary policy regimes in Canada and the U.S," Working Papers 99-13, Federal Reserve Bank of Philadelphia, revised 1999.
    6. Michael R. Pakko, 1998. "Dynamic shoe-leather costs in a shopping-time model of money," Working Papers 1998-007, Federal Reserve Bank of St. Louis.

    More about this item

    Keywords

    Monetary policy;

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