Monetary Magic? How the Fed Improved the Flexibility of the U.S. Economy

Author/Editor: Tamim Bayoumi ; Silvia Sgherri
Publication Date: February 01, 2004
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate
Summary: 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.
Series: Working Paper No. 04/24
Subject(s): Monetary policy | Inflation | United States

Author's Keyword(s): Inflation dynamics | Monetary policy | Kalman filter
Publication Date: February 01, 2004
ISBN/ISSN: 9781451844177/1018-5941 Format: Paper
Stock No: WPIEA0242004 Pages: 30
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