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Monetary Policy, Inflation Target and the Great Moderation: An Empirical Investigation

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  • Qazi Haque

    (The University of Western Australia and Centre for Applied Macroeconomic Analysis)

Abstract

This paper estimates a New Keynesian model with trend inflation and contrasts Taylor rules featuring fixed versus time-varying inflation target while allowing for passive monetary policy. The estimation is conducted over the Great Inflation and the Great Moderation periods. Time-varying inflation target empirically fits better and active monetary policy prevails in both periods, thereby ruling out sunspots as an explanation of the Great Inflation episode. Counterfactual simulations suggest that the decline in inflation volatility since the mid-1980s is mainly driven by monetary policy, while the reduction in output growth variability is explained by the reduced volatility of technology shocks.

Suggested Citation

  • Qazi Haque, 2019. "Monetary Policy, Inflation Target and the Great Moderation: An Empirical Investigation," Economics Discussion / Working Papers 19-10, The University of Western Australia, Department of Economics.
  • Handle: RePEc:uwa:wpaper:19-10
    Note: MD5 = 4e87d3ec3db34aadc5fa596778f4694b
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    1. Haque, Qazi & Groshenny, Nicolas & Weder, Mark, 2021. "Do we really know that U.S. monetary policy was destabilizing in the 1970s?," European Economic Review, Elsevier, vol. 131(C).

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    More about this item

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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