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Monetary Policy Regime Switches and Macroeconomic Dynamics

  • Andrew Foerster

    (Federal Reserve Bank of Kansas City)

This paper investigates how different monetary policy regime switching types impact macroeconomic dynamics. Policy switches that either affect the inflation target or the response to deviations of inflation from target leads to different determinacy regions and different output, interest rates, and inflation distributions. With regime switching, the standard Taylor Principle breaks down in multiple ways; satisfying the Principle period-by-period is neither necessary nor sufficient for determinacy. Switching inflation targets primarily affects the economy's level, whereas switching inflation responses affects the variance. Even in periods with fixed monetary policy, expectations of future policy switches can produce different outcomes depending upon the switching type. Monetary authorities with objectives for inflation need to adjust their policy parameters to counteract expectations of future policy switches.

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Paper provided by Society for Economic Dynamics in its series 2013 Meeting Papers with number 906.

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Date of creation: 2013
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Handle: RePEc:red:sed013:906
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

Web page: http://www.EconomicDynamics.org/
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  1. Andrew Foerster & Juan Rubio-Ramirez & Dan Waggoner & Ta Zha, 2013. "Perturbation Methods for Markov-Switching DSGE Models," Working Papers 2013-22, FEDEA.
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