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Evolving U.S. monetary policy and the decline of inflation predictability

Paolo Surico () and Luca Benati ()

No 824, Working Paper Series from European Central Bank

Abstract: Using a structural VAR with time-varying parameters and stochastic volatility on post-WWII U.S. data, we document a striking negative correlation between the evolution of the long-run coefficient on inflation in the monetary rule and the evolution of the persistence and predictability of inflation relative to a trend component. Using a standard sticky-price model, we show that a more aggressive policy stance towards inflation causes a decline in inflation predictability, providing a possible interpretation for the findings of the structural VAR. JEL Classification: E37, E52, E58

Keywords: Bayesian time-varying VARs; frequency domain; great inflation; predictability.; sign restrictions (search for similar items in EconPapers)
Date: 2007-10
Note: 802546
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Journal Article: Evolving U.S. Monetary Policy and The Decline of Inflation Predictability (2008) Downloads
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