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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. Orphanides, Athanasios & van Norden, Simon, 2005. "The Reliability of Inflation Forecasts Based on Output Gap Estimates in Real Time," CEPR Discussion Papers 4830, C.E.P.R. Discussion Papers.
  2. 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.).
  3. 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.
  4. C. John McDermott & David T. Coe, 1996. "Does the Gap Model Work in Asia?," IMF Working Papers 96/69, International Monetary Fund.
  5. Douglas O. Staiger & James H. Stock & Mark W. Watson, 1997. "How Precise Are Estimates of the Natural Rate of Unemployment?," NBER Chapters, in: Reducing Inflation: Motivation and Strategy, pages 195-246 National Bureau of Economic Research, Inc.
  6. Guy Debelle & Stanley Fischer, 1994. "How independent should a central bank be?," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 38, pages 195-225.
  7. Eric Schaling, 1999. "The non-linear Phillips curve and inflation forecast targeting," Bank of England working papers 98, Bank of England.
  8. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
  9. 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.
  10. Fischer, Stanley, 1996. " Robert Lucas's Nobel Memorial Prize," Scandinavian Journal of Economics, Wiley Blackwell, vol. 98(1), pages 11-31, March.
  11. Douglas Laxton & Michael Bleany, 1999. "Real Interest Rates and Real Exchange Rates : Evidence from Indexed Bonds," Computing in Economics and Finance 1999 942, Society for Computational Economics.
  12. Dave Turner & Elena Seghezza, 1999. "Testing for a Common OECD Phillips Curve," OECD Economics Department Working Papers 219, OECD Publishing.
  13. 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.
  14. Mark Deacon & Andrew Derry, 1994. "Estimating the Term Structure of Interest Rates," Bank of England working papers 24, Bank of England.
  15. 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.
  16. 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.
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