 Monetary Rules When Economic Behaviour ChangesRobert Amano, Donald Coletti and Tiff Macklem Staff Working Papers from Bank of Canada Abstract: This paper examines the implications of changes in economic behaviour for simple inflation-forecast–based monetary rules of the type currently used at two inflation-targeting central banks. Three types of changes in economic behaviour are considered, changes that are motivated by developments in monetary and fiscal policy in the 1990s: changes in monetary policy credibility, changes in the slope of the Phillips curve, and changes in the degree of income stabilization from automatic fiscal transfers. Analysis is conducted using stochastic simulations of a model of the Canadian economy. Two questions are posed: First, what are the implications of these types of changes in economic behaviour for the stochastic properties of the economy? Second, how are efficient inflation-forecast–based rules affected by these changes in behaviour? Perhaps the most interesting results are with respect to credibility. When monetary credibility increases, the central bank can attain more stable output and inflation. But increasing credibility is a double-edged sword. To reap its benefits, the central bank must, in general, adjust its reaction function. If it does not, volatility can increase. Keywords: Credibility; Monetary policy framework; Uncertainty and monetary policy (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:99-8 Access Statistics for this paper More papers in Staff Working Papers from Bank of Canada 234 Wellington Street, Ottawa, Ontario, K1A 0G9, Canada. Contact information at EDIRC. |
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