Many models of monetary policy predict a trade-off between inflation and output variance despite compelling evidence that the Federal Reserve has become more aggressive in fighting inflation and there has been a resulting decline in both inflation and output variance. We address this apparent...

This paper introduces model uncertainty into a simple Lucas-type monetary model. Inflation depends on agents' expectations and a vector of exogenous random variables. Following (Branch and Evans 2004) agents are assumed to underparameterize their forecasting models. A Misspecification...

The monetary policy literature has recently devoted considerable attention to Taylor-type rules, in which the interest rate set by the central bank depends on measures of inflation and aggregate output. We show that if policy-makers attempt to choose the optimal rule within a Taylor-type...

A growing body of evidence finds that policy reaction functions vary substantially over different periods in the United States. This paper explores how moving to an environment in which monetary and fiscal regimes evolve according to a Markov process can change the impacts of policy shocks....

This paper estimates simple regime-switching rules for monetary policy and tax policy over the post-war period in the United States and imposes the estimated policy process on a standard dynamic stochastic general equilibrium model with nominal rigidities. The estimated joint policy process...