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Noisy Information, Interest Rate Shocks and the Great Moderation

In this paper we quantitatively evaluate the hypothesis that the Great Moderation is partly the result of a less activist monetary policy. We simulate a New Keynesian model where the central bank can only observe a noisy estimate of the output gap and fnd that the less pronounced reaction of the Federal Reserve to output gap uctuations since 1979 can account for half of the reduction in the standard deviation of GDP associated with the Great Moderation. Our simulations are consistent with the empirically documented smaller magnitude and impact of interest rate shocks since the early 1980s.

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File URL: http://www.econ.jku.at/papers/2010/wp1007.pdf
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Paper provided by Department of Economics, Johannes Kepler University Linz, Austria in its series Economics working papers with number 2010-07.

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Length: 28 pages
Date of creation: May 2010
Date of revision:
Handle: RePEc:jku:econwp:2010_07
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Web page: http://www.econ.jku.at/

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  9. Orphanides, Athanasios, 2003. "Monetary policy evaluation with noisy information," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 605-631, April.
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  17. Smith Penelope & Summers Peter M, 2009. "Regime Switches in GDP Growth and Volatility: Some International Evidence and Implications for Modeling Business Cycles," The B.E. Journal of Macroeconomics, De Gruyter, vol. 9(1), pages 1-19, September.
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  23. Christopher A. Sims & Tao Zha, 2005. "Were There Regime Switches in U.S. Monetary Policy?," Working Papers 92, Princeton University, Department of Economics, Center for Economic Policy Studies..
  24. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  25. Olivier Blanchard & John Simon, 2001. "The Long and Large Decline in U.S. Output Volatility," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 32(1), pages 135-174.
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