Monetary Policy, Trend Inflation and the Great Moderation:An Alternative Interpretation

Olivier Coibion and Yuriy Gorodnichenko

No 94, Working Papers from Department of Economics, College of William and Mary

Abstract: With positive trend inflation, the Taylor principle is not enough to guarantee a determinate equilibrium. We provide new theoretical results on restoring determinacy in New Keynesian models with positive trend inflation and combine these with new empirical findings on the Federal Reserve’s reaction function before and after the Volcker disinflation to find that 1) while the Fed likely satisfied the Taylor principle in the pre-Volcker era, the US economy was still subject to self-fulfilling fluctuations in the 1970s, 2) the US economy moved from indeterminacy to determinacy during the Volcker disinflation, and 3) the switch from indeterminacy to determinacy was due to the changes in the Fed’s response to macroeconomic variables and the decline in trend inflation during the Volcker disinflation.

Keywords: Trend inflation; Determinacy; Great Moderation; Monetary Policy. (search for similar items in EconPapers)
JEL-codes: C22 E3 E43 E5 (search for similar items in EconPapers)
Pages: 59 pages
Date: 2010-09-15
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (41)

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Related works:
Journal Article: Monetary Policy, Trend Inflation, and the Great Moderation: An Alternative Interpretation (2011)
Working Paper: Monetary Policy, Trend Inflation and the Great Moderation: An Alternative Interpretation (2009)
Working Paper: Monetary Policy, Trend Inflation and the Great Moderation: An Alternative Interpretation (2008)
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