EVOLVING U.S. MONETARY POLICY AND THE DECLINE OF INFLATION PREDICTABILITY | Zendy

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EVOLVING U.S. MONETARY POLICY AND THE DECLINE OF INFLATION PREDICTABILITY

Author(s) -

Benati Luca,

Surico Paolo

Publication year - 2008

Publication title -

journal of the european economic association

Language(s) - English

Resource type - Journals

SCImago Journal Rank - 7.792

H-Index - 93

eISSN - 1542-4774

pISSN - 1542-4766

DOI - 10.1162/jeea.2008.6.2-3.634

Subject(s) - predictability , economics , monetary policy , inflation (cosmology) , volatility (finance) , inflation targeting , econometrics , monetary economics , stochastic volatility , keynesian economics , macroeconomics , statistics , physics , mathematics , theoretical physics

Based on a structural VAR with time‐varying parameters and stochastic volatility for the post‐WWII U.S., we document a negative correlation between the evolution of the long‐run coefficient on inflation in the structural monetary rule and the evolution of the persistence and predictability of inflation relative to a trend component. Using an estimated sticky‐price model, we show that a more aggressive policy stance towards inflation causes a decline in inflation predictability. (JEL: E37, E52, E58)

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