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Monetary Magic? How the Fed Improved the Flexibility of the U.S. Economy
Author: Mr. Tamim Bayoumi and Ms. Silvia Sgherri
Series:
IMF Working Papers
Volume/Issue:
Volume 2004: Issue 024
Language:
English
Publication Date:
01 Feb 2004
DOI:
https://doi.org/10.5089/9781451844177.001
ISBN:
9781451844177
ISSN:
1018-5941
Pages:
30
Keywords:
WP; Inflation dynamics; Monetary policy; Kalman filter; reaction function; inflation inertia; coefficient estimate; uncertainty granger; inflation expectation; Inflation; Real interest rates; Output gap; Inflation persistence; Disinflation
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IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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Extending recent theoretical contributions on sources of inflation inertia, we argue that monetary uncertainty accounts for sluggish expectations adjustment to nominal disturbances. Estimating a model in which rational individuals learn over time about shifts in U.S. monetary policy and the Phillips curve, we find strong evidence that this link exists. These results bring into question the standard approach for evaluating monetary rules by assuming unchanged private sector responses, help clarify the role of monetary stability in reducing output variability in the United States and elsewhere, and tell a subtle and dynamic story of the interaction between monetary policy and the supply side of the economy.
Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund