The Effect of Conventional and Unconventional Monetary Policy Rules on Inflation Expectations: Theory and Evidence

Roger Farmer

No 8956, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper has three parts. Part 1 constructs a classical economic model of inflation, augmented by a complete set of financial markets; I call this the core monetary model. Part 2 develops a series of calibrated examples to illustrate how the core monetary model explains the history of inflation after WWII and Part 3 provides evidence to show that the unconventional monetary policy, followed in the wake of the 2008 financial crisis, was effective in stabilizing inflation expectations. The core monetary model provides a unified framework to explain how an interest rule can be used to control inflation in normal times, and to explain the purpose of unconventional monetary policy when policy attains the zero lower bound. I argue that management of the variation in the composition of the Fed?s balance sheet, is an important tool in a central bank?s arsenal that can be used to help prevent deflation in the wake of a financial crisis.

Keywords: inflation; Interest rates; Unconventional monetary policy; Zero lower bound (search for similar items in EconPapers)
JEL-codes: E31 E4 (search for similar items in EconPapers)
Date: 2012-05
New Economics Papers: this item is included in nep-cba, nep-his, nep-mac and nep-mon
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Citations: View citations in EconPapers (15)

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Related works:
Journal Article: The effect of conventional and unconventional monetary policy rules on inflation expectations: theory and evidence (2012)
Working Paper: The Effect of Conventional and Unconventional Monetary Policy Rules on Inflation Expectations: Theory and Evidence (2012)
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