Inflation Sensitivity To Monetary Policy: What Has Changed since the Early 1980s?

Roberto Pancrazi and Marija Vukotic ()

Oxford Bulletin of Economics and Statistics, 2019, vol. 81, issue 2, 412-436

Abstract: Have conventional monetary policy instruments maintained the same ability to accommodate undesirable effects of shocks throughout the postwar period? Or has the changed economic environment characterizing the last 30 years diminished the sensitivity of macroeconomic volatility to systematic changes in the conduct of monetary policy? The answer is no to the first question and, consequently, yes to the second question. We estimate a medium‐scale New‐Keynesian model in two subsamples, 1955–79 and 1984–2012, and find that the sensitivity of inflation variance to changes in conventional monetary policy has declined. We document that the changed properties of the labour market largely contributed to this decline.

Date: 2019
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