Monetary Policy Regime Switches and Macroeconomic Dynamics

Andrew Foerster

No 906, 2013 Meeting Papers from Society for Economic Dynamics

Abstract: This paper investigates how different monetary policy regime switching types impact macroeconomic dynamics. Policy switches that either affect the inflation target or the response to deviations of inflation from target leads to different determinacy regions and different output, interest rates, and inflation distributions. With regime switching, the standard Taylor Principle breaks down in multiple ways; satisfying the Principle period-by-period is neither necessary nor sufficient for determinacy. Switching inflation targets primarily affects the economy's level, whereas switching inflation responses affects the variance. Even in periods with fixed monetary policy, expectations of future policy switches can produce different outcomes depending upon the switching type. Monetary authorities with objectives for inflation need to adjust their policy parameters to counteract expectations of future policy switches.

Date: 2013
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Related works:
Journal Article: MONETARY POLICY REGIME SWITCHES AND MACROECONOMIC DYNAMICS* (2016)
Working Paper: Monetary policy regime switches and macroeconomic dynamic (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed013:906

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