Monetary Magic? How the Fed Improved the Flexibility of the U.S. Economy
IMF Working Papers, February 1, 2004
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Bibliographic details
- Authors: Tamim Bayoumi, Silvia Sgherri
- Published: February 1, 2004
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451844177.001
Summary
- Extends recent theoretical contributions on sources of inflation inertia.
- Argues that monetary uncertainty accounts for sluggish expectations adjustment to nominal disturbances.
- Estimates a model in which rational individuals learn over time about shifts in U.S. monetary policy and the Phillips curve.
- Finds strong evidence that a link exists between monetary uncertainty and sluggish expectations adjustment.
- Concludes these results:
- Bring into question the standard approach for evaluating monetary rules that assumes unchanged private sector responses.
- Help clarify the role of monetary stability in reducing output variability in the United States and elsewhere.
- Present a subtle and dynamic story of the interaction between monetary policy and the supply side of the economy.
Key findings and implications
- Monetary uncertainty is identified as a source of inflation inertia and sluggish adjustment of expectations.
- Private sector learning about shifts in monetary policy and the Phillips curve materially influences macroeconomic dynamics.
- Evaluations of monetary rules should account for changing private sector responses rather than assuming them unchanged.
- Monetary stability contributes to reduced output variability.
Methodology and technical approach
- Uses an estimated model where rational individuals learn over time about shifts in U.S. monetary policy and the Phillips curve.
- Employs techniques consistent with recent theoretical literature on inflation inertia (specific estimation methods referenced in the text include the Kalman filter as a keyword).
Subject areas and keywords
- Subject: Disinflation, Financial services, Inflation, Inflation persistence, Output gap, Prices, Production, Real interest rates
- Keywords: coefficient estimate, Disinflation, Inflation, Inflation dynamics, inflation expectation, inflation inertia, Inflation persistence, Kalman filter, Monetary policy, Output gap, reaction function, Real interest rates, uncertainty granger, WP