Monetary Policy and Inflation Dynamics

46 Pages Posted: 19 Dec 2004

See all articles by John M. Roberts

John M. Roberts

Board of Governors of the Federal Reserve System

Date Written: October 2004

Abstract

Since the early 1980s, the United States economy has changed in some important ways: Inflation now rises considerably less when unemployment falls and the volatility of output and inflation have fallen sharply. This paper examines whether changes in monetary policy can account for these phenomena. The results suggest that changes in the parameters and shock volatility of monetary policy reaction functions can account for most or all of the change in the inflation-unemployment relationship. As in other work, monetary-policy changes can explain only a small portion of the output growth volatility decline. However, changes in policy can explain a large proportion of the reduction in the volatility of the output gap. In addition, a broader concept of monetary-policy changes - one that includes improvements in the central bank's ability to measure potential output - enhances the ability of monetary policy to account for the changes in the economy.

JEL Classification: E31, E32, E52, E61

Suggested Citation

Roberts, John M., Monetary Policy and Inflation Dynamics (October 2004). Available at SSRN: https://ssrn.com/abstract=633222 or http://dx.doi.org/10.2139/ssrn.633222

John M. Roberts (Contact Author)

Board of Governors of the Federal Reserve System ( email )

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