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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. N. Gregory Mankiw, 2006. "A Letter to Ben Bernanke," American Economic Review, American Economic Association, vol. 96(2), pages 182-184, May.
  2. Fabio Canova & Luca Gambetti, 2003. "Structural changes in the US economy: is there a role for monetary policy?," Economics Working Papers 918, Department of Economics and Business, Universitat Pompeu Fabra, revised Apr 2008.
  3. Chang-Jin Kim & Charles Nelson & Jeremy M. Piger, 2003. "The less volatile U.S. economy: a Bayesian investigation of timing, breadth, and potential explanations," Working Papers 2001-016, Federal Reserve Bank of St. Louis.
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  16. Jean Boivin & Marc P. Giannoni, 2006. "Has Monetary Policy Become More Effective?," The Review of Economics and Statistics, MIT Press, vol. 88(3), pages 445-462, August.
  17. Jeffrey C. Fuhrer & Glenn D. Rudebusch, 2002. "Estimating the Euler equation for output," Working Papers 02-3, Federal Reserve Bank of Boston.
  18. Thomas A. Lubik & Frank Schorfheide, 2004. "Testing for Indeterminacy: An Application to U.S. Monetary Policy," American Economic Review, American Economic Association, vol. 94(1), pages 190-217, March.
  19. Canova, Fabio, 1994. "Statistical Inference in Calibrated Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 9(S), pages S123-44, Suppl. De.
  20. Andreas Beyer & Roger E. A. Farmer, 2007. "Testing for Indeterminacy: An Application to U.S. Monetary Policy: Comment," American Economic Review, American Economic Association, vol. 97(1), pages 524-529, March.
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