Monetary policy and inflation dynamics

John Roberts

No 2004-62, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: Since the early 1980s, the United States economy has changed in some important ways: Inflation now rises considerably less when unemployment falls and the volatility of output and inflation have fallen sharply. This paper examines whether changes in monetary policy can account for these phenomena. The results suggest that changes in the parameters and shock volatility of monetary policy reaction functions can account for most or all of the change in the inflation-unemployment relationship. As in other work, monetary-policy changes can explain only a small portion of the output growth volatility decline. However, changes in policy can explain a large proportion of the reduction in the volatility of the output gap. In addition, a broader concept of monetary-policy changes--one that includes improvements in the central bank's ability to measure potential output--enhances the ability of monetary policy to account for the changes in the economy.

Keywords: Monetary policy - United States; Inflation (Finance) (search for similar items in EconPapers)
Date: 2004
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Citations: View citations in EconPapers (14)

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Related works:
Journal Article: Monetary Policy and Inflation Dynamics (2006)
Working Paper: Monetary Policy and Inflation Dynamics (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2004-62

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