1. Monetary Policy, Trend Inflation and the Great Moderation: An Alternative Interpretation - Comment
- Author:
- Jonas E. Arias, Guido Ascari, Nicola Branzoli, and Efrem Castelnuovo
- Publication Date:
- 01-2015
- Content Type:
- Commentary and Analysis
- Institution:
- Board of Governors of the Federal Reserve System
- Abstract:
- Working with a small-scale calibrated New-Keynesian model, Coibion and Gorodnichenko (2011) find that the reduction in trend inflation during Volcker's mandate was a key factor behind the Great Moderation. We revisit this finding with an estimated New-Keynesian model with trend inflation and no indexation based on Christiano, Eichenbaum and Evans (2005). First, our simulations confirm Coibion and Gorodnichenko's (2011) main finding. Second, we show that a trend inflation-immune Taylor rule based on economic theory can avoid indeterminacy even at high levels of trend inflation such as those observed in the 1970s.
- Topic:
- Economics, Monetary Policy, Economic Theory, and Inflation
- Political Geography:
- Global Focus