Monetary Policy across Inflation Regimes
Abstract: Does the effect of monetary policy depend on the prevailing level of inflation? In order to answer this question, we construct a parsimonious nonlinear time series model that allows for inflation regimes. We find that the effects of monetary policy are markedly different when year-over-year inflation exceeds 5.5 percent. Below this threshold, changes in monetary policy have a short-lived effect on prices, but no effect on the unemployment rate, giving a potential explanation for the recent “soft landing” in the United States. Above this threshold, the effects of monetary policy surprises on both inflation and unemployment can be larger and longer lasting.
File format is application/pdf
Description: Full text
File format is text/html
Provider: Federal Reserve Bank of New York
Part of Series: Staff Reports
Publication Date: 2024-01-01