IDEAS home Printed from
   My bibliography  Save this paper

Monetary Rules, Indeterminacy, and the Business-Cycle Stylised Facts


  • Luca Benati


Several papers have documented how the reaction function of the U.S. monetary authority has been passive, and destabilising, before Volcker"s appointment, and active and stabilising since then. In this paper we first compare the two sub-periods in terms of several key business-cycle 'stylised facts'. The latter period appears to be characterised by a lower inflation persistence; a smaller volatility of reduced-form innovations to both inflation and real GDP growth; and a systematically smaller amplitude of business-cycle frequency fluctuations. Working with the Smets-Wouters (2003) sticky-price, sticky-wage DSGE model of the U.S. economy, we then investigate how such stylised facts change systematically with changes in the parameters of a simple forward-looking monetary rule. We solve the model under indeterminacy via the procedure introduced by Lubik and Schorfheide (2003). The determinacy and indeteminacy regions appear to be characterised by markedly different sets of stylised facts. In several cases the relationship between the parameters of the monetary rule and key stylised facts under indeterminacy is a mirror image of what it is under determinacy: both inflation persistence and the volatility of its reduced-form innovations, for example, are increasing in the coefficient on inflation under indeterminacy, decreasing under determinacy. We finally compare the facts identified in the data with those generated by the model conditional on estimated monetary rules.

Suggested Citation

  • Luca Benati, 2004. "Monetary Rules, Indeterminacy, and the Business-Cycle Stylised Facts," Computing in Economics and Finance 2004 83, Society for Computational Economics.
  • Handle: RePEc:sce:scecf4:83

    Download full text from publisher

    File URL:
    Download Restriction: no


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

    Cited by:

    1. Marco Lombardi & Silvia Sgherri, 2007. "(Un)naturally Low? Sequential Monte Carlo Tracking of the US Natural Interest Rate," DNB Working Papers 142, Netherlands Central Bank, Research Department.
    2. Zheng, Tingguo & Guo, Huiming, 2013. "Estimating a small open economy DSGE model with indeterminacy: Evidence from China," Economic Modelling, Elsevier, vol. 31(C), pages 642-652.
    3. repec:wyi:journl:002201 is not listed on IDEAS
    4. Assenmacher-Wesche, Katrin & Gerlach, Stefan, 2008. "Money growth, output gaps and inflation at low and high frequency: Spectral estimates for Switzerland," Journal of Economic Dynamics and Control, Elsevier, vol. 32(2), pages 411-435, February.
    5. Paolo Surico, 2005. "Monetary Policy Shifts, Indeterminacy and Inflation Dynamics," Macroeconomics 0504014, EconWPA.

    More about this item


    monetary policy rules; indeterminacy; business cycles; frequency domain; median-unbiased estimation.;

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

    NEP fields

    This paper has been announced in the following NEP Reports:


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:sce:scecf4:83. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.