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Assessing Different Drivers of the GreatModeration in the U.S

  • Efrem Castelnuovo

    ()

    (University of Padua)

This paper employs a calibrated new-Keynesian DSGE model to assess the relative importance of two different, potentially important drivers of the Great Moderation in the U.S., namely 'good policy' vs. 'good luck'. The calibrated model is capable to replicate the actual standard deviations of inflation and output. Factual and counterfactual simulations are run in order to gauge the relative importance of the systematic monetary policy vs. the stochastic shocks hitting the economic system in shaping some macroeconomic volatilities. Importantly, under the bad policy scenario sunspots may influence the equilibrium values of the macroeconomic variables of interest, and distortions in the transmission mechanism going from the structural shocks to the variables of interest are allowed for. Our findings support the relevance of both drivers in causing inflation volatility. By contrast, output volatility can hardly be explained by a monetary policy switch like the one occurred in the U.S. at the end of the '70s.

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Paper provided by Dipartimento di Scienze Economiche "Marco Fanno" in its series "Marco Fanno" Working Papers with number 0025.

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Length: 29 pages
Date of creation: Aug 2006
Date of revision:
Handle: RePEc:pad:wpaper:0025
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  1. James H. Stock & Mark W. Watson, 2003. "Has the business cycle changed?," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 9-56.
  2. Rudebusch, Glenn D., 2000. "Assessing nominal income rules for monetary policy with model and data uncertainty," Working Paper Series 0014, European Central Bank.
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  9. Lubik, Thomas A. & Schorfheide, Frank, 2003. "Computing sunspot equilibria in linear rational expectations models," Journal of Economic Dynamics and Control, Elsevier, vol. 28(2), pages 273-285, November.
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  16. Christopher A. Sims & Tao Zha, 2006. "Were There Regime Switches in U.S. Monetary Policy?," American Economic Review, American Economic Association, vol. 96(1), pages 54-81, March.
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