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Working Paper
Monetary Policy and Macroeconomic Stability Revisited
A large literature has established that the Fed? change from a passive to an active policy response to inflation led to US macroeconomic stability after the Great Inflation of the 1970s. This paper revisits the literature?s view by estimating a generalized New Keynesian model using a full-information Bayesian method that allows for equilibrium indeterminacy and adopts a sequential Monte Carlo algorithm. The model empirically outperforms canonical New Keynesian models that confirm the literature?s view. Our estimated model shows an active policy response to inflation even during the Great ...
Working Paper
A Theory of Intrinsic Inflation Persistence
We propose a novel theory of intrinsic inflation persistence by introducing trend inflation and variable elasticity of demand in a model with staggered price and wage setting. Under nonzero trend inflation, the variable elasticity generates intrinsic persistence in inflation through a measure of price dispersion stemming from staggered price setting. It also introduces intrinsic persistence in wage inflation under staggered wage setting, which affects price inflation. With the theory we show that inflation exhibits a persistent, hump-shaped response to a monetary policy shock. We also show ...
Working Paper
Monetary Policy, Trend Inflation and the Great Moderation: An Alternative Interpretation - Comment
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 ...
Briefing
What Does Sectoral Inflation Tell Us About the Aggregate Trend in Inflation?
To know the appropriate stance of monetary policy, policymakers need to determine the overall trend in inflation. This is challenging in the face of varied and evolving patterns in inflation across sectors. We describe a multisector statistical model that provides a systematic approach to appropriately weight incoming inflation data from each sector. By flexibly applying time-varying weights to different sectors, this model adjusts to changing patterns in these sectors over time — including during the pandemic — and suggests that trend inflation is lower than might be suggested by the ...