Targets, Policy Lags and Sticky Prices in a Two-Equation Model of US Stabilization Policy
Carlin and Soskice (2005) advocate a 3-equation model of stabilization policy. One equation is a monetary reaction rule MR derived by assuming that governments have performance objectives, but are constrained by a Phillips curve PC. Central banks attempt to implement these objectives by setting interest rates along an IS curve. They label this the IS-PC-MR model. Observing that governments have more tools than just the interest rate, we drop the IS equation, simplifying their model to 2 equations. Adding a random walk model of the unobserved potential growth, we develop their PC-MR model into a state space specification of the short-run political economy. This is an appropriate econometric method because it incorporates recursive forecasts of unobservable state variables based on contemporaneous information measured with real-time data. Our results are generally consistent with US economic history. One qualification is that governments are more likely to target growth rates than output gaps. Another is that policy affects outcomes after a single lag. This assumption fits the data better than an alternative double-lag timing: one lag for output, plus a second for inflation has been proposed. We also infer that inflation expectations are more likely to be backward rather than forward looking.
|Date of creation:||2011|
|Date of revision:|
|Contact details of provider:|| Postal: 1645 E. Central Campus Dr. Front, Salt Lake City, UT 84112-9300|
Phone: (801) 581-7481
Fax: (801) 585-5649
Web page: http://economics.utah.edu
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Jeremy B. Rudd & Karl Whelan, 2003.
"Can rational expectations sticky-price models explain inflation dynamics?,"
Finance and Economics Discussion Series
2003-46, Board of Governors of the Federal Reserve System (U.S.).
- Jeremy Rudd & Karl Whelan, 2006. "Can Rational Expectations Sticky-Price Models Explain Inflation Dynamics?," American Economic Review, American Economic Association, vol. 96(1), pages 303-320, March.
- Jeremy Rudd & Karl Whelan, 2006. "Can rational expectations sticky-price models explain inflation dynamics?," Open Access publications 10197/199, School of Economics, University College Dublin.
- Karl Whelan & Jeremy Rudd, 2003. "Can Rational Expectations Sticky-Price Models Explain Inflation Dynamics?," Computing in Economics and Finance 2003 181, Society for Computational Economics.
- Jeremy Rudd & Karl Whelan, 2003. "Can rational expectations sticky-price models explain inflation dynamics," Open Access publications 10197/239, School of Economics, University College Dublin.
- Rudd, Jeremy & Whelan, Karl, 2003. "Can Rational Expectations Sticky-Price Models Explain Inflation Dynamics," Research Technical Papers 5/RT/03, Central Bank of Ireland.
- Carlin, Wendy & Soskice, David, 2004.
"The 3-Equation New Keynesian Model: A Graphical Exposition,"
CEPR Discussion Papers
4588, C.E.P.R. Discussion Papers.
- Carlin Wendy & Soskice David, 2005. "The 3-Equation New Keynesian Model --- A Graphical Exposition," The B.E. Journal of Macroeconomics, De Gruyter, vol. 5(1), pages 1-38, December.
- Croushore, Dean & Stark, Tom, 2001.
"A real-time data set for macroeconomists,"
Journal of Econometrics,
Elsevier, vol. 105(1), pages 111-130, November.
- John M. Roberts, 2001.
"How well does the New Keynesian sticky-price model fit the data?,"
Finance and Economics Discussion Series
2001-13, Board of Governors of the Federal Reserve System (U.S.).
- Roberts John M., 2005. "How Well Does the New Keynesian Sticky-Price Model Fit the Data?," The B.E. Journal of Macroeconomics, De Gruyter, vol. 5(1), pages 1-39, September.
When requesting a correction, please mention this item's handle: RePEc:uta:papers:2011_03. 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: ()
If references are entirely missing, you can add them using this form.