Deconstructing the Art of Central Banking
October 1, 2004
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Summary
This paper proposes a markedly different transmission mechanism from monetary policy to the macroeconomy, focusing on how policy changes nominal inertia in the Phillips curve. Using recent theoretical developments, we examine the properties of a small, estimated U.S. monetary model distinguishing four monetary regimes employed since the late 1950s. We find that changes in monetary policy are linked to shifts in nominal inertia, and that these improvements in supply-side flexibility are indeed the main channel through which monetary policy lowers the volatility of inflation and, even more importantly, output.
Subject: Econometric analysis, Estimation techniques, Financial services, Inflation, Inflation targeting, Output gap, Prices, Production, Real interest rates
Keywords: Estimation techniques, inflation, inflation dynamics, inflation inertia, inflation uncertainty, inflation volatility, monetary policy, monetary policy uncertainty, Output gap, rational expectation models, reaction function, Real interest rates, WP
Pages:
36
Volume:
2004
DOI:
Issue:
195
Series:
Working Paper No. 2004/195
Stock No:
WPIEA1952004
ISBN:
9781451859942
ISSN:
1018-5941
