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Board of Governors of the Federal Reserve System (U.S.)
International Finance Discussion Papers
Monetary Policy, Trend Inflation and the Great Moderation: An Alternative Interpretation - Comment
Jonas E. Arias
Guido Ascari
Nicola Branzoli
Efrem Castelnuovo
Abstract

Working with a small-scale calibrated New-Keynesian model, Coibion and Gorodnichenko (2011) find that the reduction in trend inflation during Volcker's mandate was a key factor behind the Great Moderation. We revisit this finding with an estimated New-Keynesian model with trend inflation and no indexation based on Christiano, Eichenbaum and Evans (2005). First, our simulations confirm Coibion and Gorodnichenko's (2011) main finding. Second, we show that a trend inflation-immune Taylor rule based on economic theory can avoid indeterminacy even at high levels of trend inflation such as those observed in the 1970s.


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Jonas E. Arias & Guido Ascari & Nicola Branzoli & Efrem Castelnuovo, Monetary Policy, Trend Inflation and the Great Moderation: An Alternative Interpretation - Comment, Board of Governors of the Federal Reserve System (U.S.), International Finance Discussion Papers 1127, 29 Oct 2014.
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Keywords: Trend inflation; determinacy; and monetary policy
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