55 Pages Posted: 26 May 2011 Last revised: 23 Jun 2015
Date Written: July 2014
We estimate a New-Keynesian macro model accommodating regime-switching behavior in monetary policy and in macro shocks. Key to our estimation strategy is the use of survey-based expectations for inflation and output. Output and inflation shocks shift to the low volatility regime around 1985 and 1990, respectively. However, we also identify multiple shifts between accommodating and active monetary policy regimes, which play an as important role as shock volatility in driving the volatility of the macro variables. We provide new estimates of the onset and demise of the Great Moderation and quantify the relative role played by macro-shocks and monetary policy. The estimated rational expectations model exhibits indeterminacy in the mean square stability sense, mainly because monetary policy is excessively passive.
Keywords: Monetary policy, regime-switching, survey expectations, New-Keynesian models, Great Moderation, macroeconomic volatility, Phillips Curve, Determinacy
JEL Classification: E31, E32, E52, E58, C42, C53
Suggested Citation: Suggested Citation