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The Great Deception: the ‘science’ of monetary policy and the Great Moderation revisited

Author

Listed:
  • Gilberto Tadeu Lima

    () (Department of Economics, University of Sao Paulo)

  • Mark Setterfield

    () (Department of Economics, New School for Social Research)

  • Jaylson Jair da Silveira

    () (Department of Economics and International Relations, Federal University of Santa Catarina)

Abstract

Conventional wisdom suggests that the Great Moderation was caused by either good policy, good luck (favourable shocks), more efficient private sector behaviour (such as better inventory management), or more effective financial innovations. We show that it may, instead, have originated from the complementarity of an erroneous reading of the economy by central bankers and evolutionarily time-varying heterogeneity in inflation expectations formation within the private sector. One general finding of our analysis is that seemingly inadequate stabilization policies may, in fact, work. We comment on the broader ramifications for stabilization policy of this finding.

Suggested Citation

  • Gilberto Tadeu Lima & Mark Setterfield & Jaylson Jair da Silveira, 2017. "The Great Deception: the ‘science’ of monetary policy and the Great Moderation revisited," Working Papers 1729, New School for Social Research, Department of Economics.
  • Handle: RePEc:new:wpaper:1729
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    References listed on IDEAS

    as
    1. Keating, John W. & Valcarcel, Victor J., 2017. "What's so great about the Great Moderation?," Journal of Macroeconomics, Elsevier, vol. 51(C), pages 115-142.
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    3. Steven J. Davis & James A. Kahn, 2008. "Interpreting the Great Moderation: Changes in the Volatility of Economic Activity at the Macro and Micro Levels," Journal of Economic Perspectives, American Economic Association, vol. 22(4), pages 155-180, Fall.
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    14. Gilberto Tadeu Lima & Mark Setterfield, 2014. "The Cost Channel of Monetary Transmission and Stabilization Policy in a Post-Keynesian Macrodynamic Model," Review of Political Economy, Taylor & Francis Journals, vol. 26(2), pages 258-281, April.
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    More about this item

    Keywords

    Great Moderation; monetary policy; inflation targeting; macroeconomic stability; heterogeneous inflation expectations; satisficing evolutionary dynamics;

    JEL classification:

    • B52 - Schools of Economic Thought and Methodology - - Current Heterodox Approaches - - - Historical; Institutional; Evolutionary
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E71 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on the Macro Economy

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