Monetary Policy, Trend Inflation and the Great Moderation: An Alternative Interpretation - Comment

23 Pages Posted: 31 May 2017

See all articles by Jonas Arias

Jonas Arias

Federal Reserve Bank of Philadelphia

Guido Ascari

University of Pavia

Nicola Branzoli

Bank of Italy

Efrem Castelnuovo

University of Melbourne - Department of Economics

Date Written: 2014-10-29

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.

Keywords: Trend inflation, determinacy, and monetary policy

JEL Classification: C22, E30, E52

Suggested Citation

Arias, Jonas and Ascari, Guido and Branzoli, Nicola and Castelnuovo, Efrem, Monetary Policy, Trend Inflation and the Great Moderation: An Alternative Interpretation - Comment (2014-10-29). FRB International Finance Discussion Paper No. 1127. Available at SSRN: https://ssrn.com/abstract=2976821

Jonas Arias (Contact Author)

Federal Reserve Bank of Philadelphia ( email )

10 N Independence Mall W
Philadelphia, PA 19106
United States

Guido Ascari

University of Pavia ( email )

27100 Pavia
Italy
+39 0382 506211 (Phone)
+39 304226 (Fax)

Nicola Branzoli

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Efrem Castelnuovo

University of Melbourne - Department of Economics ( email )

Melbourne, 3010
Australia

HOME PAGE: http://https://sites.google.com/site/efremcastelnuovo/home

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