## Deconstructing the Art of Central Banking

_IMF Working Papers, October 1, 2004_

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## Bibliographic details
- Authors: Tamim Bayoumi, Silvia Sgherri
- Published: October 1, 2004
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451859942.001

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### Summary and central claim
- The 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, the authors examine a small, estimated U.S. monetary model distinguishing four monetary regimes employed since the late 1950s.
- Main finding: changes in monetary policy are linked to shifts in nominal inertia, and improvements in supply-side flexibility (via reduced nominal inertia) are the main channel through which monetary policy lowers the volatility of inflation and, even more importantly, output.

### Methodology and model
- Approach: analysis based on recent theoretical developments and estimation of a small U.S. monetary model.
- Model structure: distinguishes four monetary regimes employed since the late 1950s.
- Emphasis on the Phillips curve and nominal inertia as the transmission mechanism linking policy to macroeconomic outcomes.

### Key findings and propositions
- Changes in monetary policy correlate with shifts in nominal inertia.
- Reductions in nominal inertia (improvements in supply-side flexibility) are the principal channel through which monetary policy:
  - Lowers the volatility of inflation.
  - Lowers the volatility of output (noted as even more important than inflation volatility reductions).

### Subject areas and keywords
- 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

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/31/deconstructing-the-art-of-central-banking-17727_