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Monetary Policy Credibility and the Unemployment-Inflation Tradeoff: Some Evidence From 17 Industrial Countries

  • Papa M'B. P. N'Diaye
  • Douglas Laxton

Using data on long-term interest rates for 17 industrial countries, this paper develops some simple measures of monetary policy credibility and then tests if such measures improve the out-of-sample forecasts of conventional models of the inflation-unemployment process. The results provide some evidence in favor of the Lucas critique by showing that the short-run unemployment-inflation trade-off tends to improve in countries that are successful in providing low and stable inflation.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 02/220.

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Length: 39
Date of creation: 01 Dec 2002
Date of revision:
Handle: RePEc:imf:imfwpa:02/220
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  1. Fischer, Stanley, 1996. " Robert Lucas's Nobel Memorial Prize," Scandinavian Journal of Economics, Wiley Blackwell, vol. 98(1), pages 11-31, March.
  2. Douglas Staiger & James H. Stock & Mark W. Watson, 1996. "How Precise are Estimates of the Natural Rate of Unemployment?," NBER Working Papers 5477, National Bureau of Economic Research, Inc.
  3. Laurence Boone & Michel Juillard & Doug Laxton & Papa N'Diaye, 2002. "How Well Do Alternative Time-Varying Parameter Models of the NAIRU Help Policymakers Forecast Unemployment and Inflation in the OECD Countries?," Computing in Economics and Finance 2002 359, Society for Computational Economics.
  4. C. John McDermott & David T. Coe, 1996. "Does the Gap Model Work in Asia?," IMF Working Papers 96/69, International Monetary Fund.
  5. Athanasios Orphanides & Simon van Norden, 2004. "The reliability of inflation forecasts based on output gap estimates in real time," Finance and Economics Discussion Series 2004-68, Board of Governors of the Federal Reserve System (U.S.).
  6. Guy Debelle & Stanley Fischer, 1994. "How independent should a central bank be?," Working Papers in Applied Economic Theory 94-05, Federal Reserve Bank of San Francisco.
  7. Eric Schaling, 1999. "The non-linear Phillips curve and inflation forecast targeting," Bank of England working papers 98, Bank of England.
  8. Michael Bleaney & Douglas Laxton, 2003. "Real Interest Rates And Real Exchange Rates: Evidence From Indexed Bonds," Manchester School, University of Manchester, vol. 71(1), pages 65-77, January.
  9. Christopher J. Erceg & Andrew T. Levin, 2001. "Imperfect credibility and inflation persistence," Finance and Economics Discussion Series 2001-45, Board of Governors of the Federal Reserve System (U.S.).
  10. James H. Stock & Mark W. Watson, 1996. "Asymptotically Median Unbiased Estimation of Coefficient Variance in a Time Varying Parameter Model," NBER Technical Working Papers 0201, National Bureau of Economic Research, Inc.
  11. Kuttner, Kenneth N, 1994. "Estimating Potential Output as a Latent Variable," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(3), pages 361-68, July.
  12. Guy Debelle & Jenny Wilkinson, 2002. "Inflation Targeting and the Inflation Process: Some Lessons from an Open Economy," RBA Research Discussion Papers rdp2002-01, Reserve Bank of Australia.
  13. David G. Barr & John Y. Campbell, 1995. "Inflation, Real Interest Rates and the Bond Market: A Study of UK Nominal Index-Linked Government Bond Prices," Harvard Institute of Economic Research Working Papers 1731, Harvard - Institute of Economic Research.
  14. Dave Turner & Elena Seghezza, 1999. "Testing for a Common OECD Phillips Curve," OECD Economics Department Working Papers 219, OECD Publishing.
  15. Mark Deacon & Andrew Derry, 1994. "Estimating the Term Structure of Interest Rates," Bank of England working papers 24, Bank of England.
  16. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
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