Asymmetric expectation effects of regime shifts and the Great Moderation

Zheng Liu, Daniel Waggoner and Tao Zha

No 2007-23, FRB Atlanta Working Paper from Federal Reserve Bank of Atlanta

Abstract: The possibility of regime shifts in monetary policy can have important effects on rational agents' expectation formation and equilibrium dynamics. In a dynamic stochastic general equilibrium model where the monetary policy rule switches between a dovish regime that accommodates inflation and a hawkish regime that stabilizes inflation, the expectation effect is asymmetric across regimes. Such an asymmetric effect makes it difficult but still possible to generate substantial reductions in the volatilities of inflation and output as the monetary policy switches from the dovish regime to the hawkish one.

Date: 2007
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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Working Paper: Asymmetric expectation effects of regime shifts and the Great Moderation (2007)
Working Paper: Asymmetric Expectation Effects of Regime Shifts and the Great Moderation (2007)
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