Monetary Policy Credibility and the Unemployment-Inflation Tradeoff: Some Evidence From 17 Industrial Countries
IMF Working Papers, December 1, 2002
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- Monetary Policy Credibility and the Unemployment-Inflation Tradeoff: Some Evidence From 17 Industrial Countries
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Bibliographic details
- Authors: Papa M N'Diaye, Douglas Laxton
- Published: December 1, 2002
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451875218.001
Overview
- Title: "Monetary Policy Credibility and the Unemployment-Inflation Tradeoff: Some Evidence From 17 Industrial Countries"
- Authors: Papa M N'Diaye, Douglas Laxton
- Date: December 1, 2002
- Core objective: Develop simple measures of monetary policy credibility using data on long-term interest rates for 17 industrial countries and test whether those measures improve out-of-sample forecasts of conventional models of the inflation-unemployment process.
- Central conclusion: The results provide some evidence in favor of the Lucas critique by showing that the short-run unemployment-inflation trade-off tends to improve in countries that are successful in providing low and stable inflation.
Methodology and Data
- Data source emphasis: long-term interest rates for 17 industrial countries.
- Analytical approach: develop simple measures of monetary policy credibility and incorporate them into out-of-sample forecast tests of conventional models of the inflation-unemployment process.
- Conceptual anchors and keywords used in analysis: Inflation, inflation expectation, Inflation targeting, Long term interest rates, Lucas Critique, Monetary Policy, Phillips Curve, Real interest rates, short-run unemployment inflation trade-off, short-run unemployment-inflation trade-off, Unemployment, unemployment gap, unemployment-inflation process.
Key Findings and Evidence
- Evidence supports the Lucas critique: parameter relationships in the short-run unemployment-inflation trade-off change with improvements in monetary policy credibility.
- Relationship documented: the short-run unemployment-inflation trade-off tends to improve in countries that achieve low and stable inflation.
- Empirical scope: analysis and results are based on data from 17 industrial countries (as stated).
Policy Implications and Interpretations
- Strengthening monetary policy credibility (as captured by long-term interest rate–based measures) is associated with a more favorable short-run unemployment-inflation trade-off.
- Implication for policymakers: success in providing low and stable inflation can alter short-run macroeconomic trade-offs, consistent with the Lucas critique; this suggests policy evaluation and model specification should account for credibility effects.