Monetary Policy, Trend Inflation, and the Great Moderation: An Alternative Interpretation
With positive trend inflation, the Taylor principle does not guarantee a determinate equilibrium. We provide new theoretical results on determinacy in New Keynesian models with positive trend inflation and new empirical findings on the Federal Reserve's reaction function before and after the Volcker disinflation to find that, (i) while the Fed likely satisfied the Taylor principle before Volcker, the US economy was still subject to self-fulfilling fluctuations in the 1970s, (ii) the US economy switched to determinacy during the Volcker disinflation, and (iii) the switch reflected changes in the Fed's response to macroeconomic variables and the decline in trend inflation. (JEL E12, E23, E31, E32, E52)
Year of publication: |
2011
|
---|---|
Authors: | Coibion, Olivier ; Gorodnichenko, Yuriy |
Published in: |
American Economic Review. - American Economic Association - AEA. - Vol. 101.2011, 1, p. 341-70
|
Publisher: |
American Economic Association - AEA |
Saved in:
Online Resource
Saved in favorites
Similar items by person
-
Information Rigidity and the Expectations Formation Process : A Simple Framework and New Facts
Coibion, Olivier, (2012)
-
The Cyclicality of Sales, Regular and Effective Prices : Business Cycle and Policy Implications
Coibion, Olivier, (2012)
-
Coibion, Olivier, (2019)
- More ...