Evolving U.S. Monetary Policy and the Decline of Inflation Predictability

26 Pages Posted: 2 Nov 2007

See all articles by Luca Benati

Luca Benati

European Central Bank (ECB)

Paolo Surico

London Business School - Department of Economics; Centre for Economic Policy Research (CEPR)

Date Written: October 2007

Abstract

Using a structural VAR with time-varying parameters and stochastic volatility on post-WWII U.S. data, we document a striking negative correlation between the evolution of the long-run coefficient on inflation in the monetary rule and the evolution of the persistence and predictability of inflation relative to a trend component. Using a standard sticky-price model, we show that a more aggressive policy stance towards inflation causes a decline in inflation predictability, providing a possible interpretation for the findings of the structural VAR.

Keywords: Bayesian time-varying VARs, sign restrictions, frequency domain, Great Inflation, predictability

JEL Classification: E37, E52, E58

Suggested Citation

Benati, Luca and Surico, Paolo, Evolving U.S. Monetary Policy and the Decline of Inflation Predictability (October 2007). ECB Working Paper No. 824. Available at SSRN: https://ssrn.com/abstract=1020094

Luca Benati (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Paolo Surico

London Business School - Department of Economics ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom

HOME PAGE: http://sites.google.com/site/paolosurico

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

HOME PAGE: http://sites.google.com/site/paolosurico

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