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 Vo...

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Bibliographic Details
Published inThe American economic review Vol. 101; no. 1; pp. 341 - 370
Main Authors Coibion, Olivier, Gorodnichenko, Yuriy
Format Journal Article
LanguageEnglish
Published Nashville American Economic Association 01.02.2011
Subjects
Central banks
Determinacy
Economic conditions
Economic inflation
Economic models
Economic theory
Economic trends
Equilibrium
Estimates
Federal Reserve Bank
Federal Reserve monetary policy
Hypotheses
Inflation
Inflation rates
Interest rates
Keynesian theory
Keynesianism
Macroeconomics
Monetary policy
Neokeynesianism
Output gaps
Shorter Papers
Studies
Taylor rule
U.S.A
United States > US
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Summary: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)
Bibliography:ObjectType-Article-2
SourceType-Scholarly Journals-1
ObjectType-Feature-1
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ISSN:0002-8282
1944-7981
DOI:10.1257/aer.101.1.341