Monetary Policy, Trend Inflation and the Great Moderation: An Alternative Interpretation

Olivier Coibion and Yuriy Gorodnichenko

No 14621, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: With positive trend inflation, the Taylor principle is not enough to guarantee a determinate equilibrium. We provide new theoretical results on restoring determinacy in New Keynesian models with positive trend inflation and combine these with new empirical findings on the Federal Reserve's reaction function before and after the Volcker disinflation to find that 1) while the Fed likely satisfied the Taylor principle in the pre-Volcker era, the US economy was still subject to self-fulfilling fluctuations in the 1970s, 2) the US economy moved from indeterminacy to determinacy during the Volcker disinflation, and 3) the switch from indeterminacy to determinacy was due to the changes in the Fed's response to macroeconomic variables and the decline in trend inflation during the Volcker disinflation.

JEL-codes: C22 E3 E43 E5 (search for similar items in EconPapers)
Date: 2008-12
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Note: EFG ME
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Citations: View citations in EconPapers (28)

Published as Olivier Coibion & Yuriy Gorodnichenko, 2011. "Monetary Policy, Trend Inflation, and the Great Moderation: An Alternative Interpretation," American Economic Review, American Economic Association, vol. 101(1), pages 341-70, February.

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Related works:
Journal Article: Monetary Policy, Trend Inflation, and the Great Moderation: An Alternative Interpretation (2011)
Working Paper: Monetary Policy, Trend Inflation and the Great Moderation:An Alternative Interpretation (2010)
Working Paper: Monetary Policy, Trend Inflation and the Great Moderation: An Alternative Interpretation (2009)
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