Inflation Sensitivity to Monetary Policy: What Has Changed Since the Early 1980s?

25 Pages Posted: 7 Mar 2019

Date Written: April 2019

Abstract

Have conventional monetary policy instruments maintained the same ability to accommodate undesirable effects of shocks throughout the postwar period? Or has the changed economic environment characterizing the last 30 years diminished the sensitivity of macroeconomic volatility to systematic changes in the conduct of monetary policy? The answer is no to the first question and, consequently, yes to the second question. We estimate a medium‐scale New‐Keynesian model in two subsamples, 1955–79 and 1984–2012, and find that the sensitivity of inflation variance to changes in conventional monetary policy has declined. We document that the changed properties of the labour market largely contributed to this decline.

Suggested Citation

Pancrazi, Roberto and Vukotic, Marija, Inflation Sensitivity to Monetary Policy: What Has Changed Since the Early 1980s? (April 2019). Oxford Bulletin of Economics and Statistics, Vol. 81, Issue 2, pp. 412-436, 2019. Available at SSRN: https://ssrn.com/abstract=3347995 or http://dx.doi.org/10.1111/obes.12272

Roberto Pancrazi (Contact Author)

Independent

No Address Available

Marija Vukotic

University of Warwick ( email )

Gibbet Hill Rd.
Coventry, West Midlands CV4 8UW
United Kingdom

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