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Monetary Magic? How the Fed Improved the Supply Side of the Economy

Silvia Sgherri () and Tamim Bayoumi

No 422, Econometric Society 2004 Far Eastern Meetings from Econometric Society

Abstract: Extending recent theoretical contributions on sources of inflation inertia, we argue that monetary uncertainty accounts for sluggish expectations adjustment to nominal disturbances. Estimating a model in which rational individuals learn over time about shifts in U.S. monetary policy and the Phillips curve, we find strong evidence that this link exists. These results question the standard approach for evaluating monetary rules by assuming unchanged private sector responses, help clarify the role of monetary stability in reducing output variability in the U.S. and elsewhere, and tell a subtle and dynamic story of the interaction between monetary policy and the supply-side of the econo

Keywords: Inflation dynamics; Monetary policy; Kalman filter (search for similar items in EconPapers)
JEL-codes: E31 E52 C51 (search for similar items in EconPapers)
Date: 2004-08-11
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