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Monetary Policy, Nominal Interest Rates, and Long–Horizon Inflation Uncertainty
Author(s) -
Wright Stephen
Publication year - 2002
Publication title -
scottish journal of political economy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.4
H-Index - 46
eISSN - 1467-9485
pISSN - 0036-9292
DOI - 10.1111/1467-9485.00221
Subject(s) - economics , monetary policy , inflation (cosmology) , real interest rate , predictability , nominal interest rate , interest rate , monetary economics , empirical evidence , fisher hypothesis , inflation targeting , unit root , international fisher effect , horizon , macroeconomics , keynesian economics , econometrics , philosophy , physics , epistemology , quantum mechanics , theoretical physics , astronomy
Empirical evidence presented in this paper shows that the predictability of inflation at long horizons varies considerably across countries. Both simple theory and empirical evidence suggest that the crucial factor is the extent to which systematic monetary policy succeeds in preventing a unit root in inflation. The mechanism by which it does this appears however to be complicated by strong empirical evidence that nominal as well as real interest rates have real effects, which implies that monetary policy need not be so vigorous in reactions to inflation. This helps to explain why inflation rates in the US and (especially) Germany have been relatively predictable, despite monetary policy rules which appear to have been barely stabilising. The paper also presents tentative evidence that the power of nominal interest rate effects is inversely related to long–horizon inflation uncertainty, and hence ultimately uncertainty about monetary policy.