In this paper we study 2-state Markov switching VAR models of monthly unemployment and inflation for three countries …: Sweden, United Kingdom, and the United States. The primary purpose is to examine if periods of low inflation are associated … variance in unemployment. In the U.S. case we find that the variance of unemployment is lower in the low inflation regime than …

expectations operator that, relative to rational expectations, assigns greater probability to extreme inflation and consumption … outcomes. Second, the central bank's skepticism about its model causes it to move forcefully to stabilize inflation following …

the Taylor rule is beneficial if the central bank aims at optimally stabilizing inflation and output gap variability under … discretion. Placing a weight on deviations from a simple Taylor rule increases the overall relative weight of inflation …

We use a simple New Keynesian model, with firm specific capital, non-zero steady-state inflation, long-run risks and … rate by 150 basis points causes output and inflation volatility to rise around 10% above their steady-state standard … deviations from the policy rule and the results are re-enforced by the presence of non-zero trend inflation. …