Monetary policy, trend inflation, and the Great Moderation: an alternative interpretation: comment based on system estimation

RePEc Short ID: pva357
ORCID iD: 0000-0002-8972-523X

Hirose, Yasuo; Kurozumi, Takushi; Van Zandweghe, Willem

Working Paper

Monetary policy, trend inflation, and the Great Moderation: an alternative interpretation: comment based on system estimation

Abstract: What caused the U.S. economy's shift from the Great Inflation era to the Great Moderation era? {{p}} A large literature shows that the shift was achieved by the change in monetary policy from a passive to an active response to inflation. However, Coibion and Gorodnichenko (2011) attribute the shift to a fall in trend inflation along with the policy change, based on a solely estimated Taylor rule and a calibrated staggered-price model. We estimate the Taylor rule and the staggered-price model jointly and demonstrate that the change in monetary policy responses to inflation and other variables suffices for explaining the shift.

Keywords: Equilibrium indeterminacy; Monetary policy; Inflation;

JEL Classification: C11; E31; E52;