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Type: Working paper
Title: Monetary policy, target inflation and the great moderation: an empirical investigation
Author: Haque, Q.
Publisher: School of Economics, The University of Adelaide
Issue Date: 2017
Series/Report no.: School of Economics Working Papers, Working Paper No. 2017 - 10
Statement of
Qazi Haque
Abstract: This paper compares the empirical fit of a Taylor rule featuring constant versus time-varying inflation target by estimating a Generalized New Keyne- sian model under positive trend inflation while allowing for indeterminacy. The estimation is conducted over two diĀ¤erent periods covering the Great Inflation and the Great Moderation. We find that the rule embedding time variation in target inflation turns out to be empirically superior and determinacy prevails in both sample periods. Counterfactual simulations point toward both 'good policy' and 'good luck' as drivers of the Great Moderation. We find that bet- ter monetary policy, both in terms of a more active response to inflation gap and a more anchored inflation target, has resulted in the decline in inflation gap volatility and predictability. In contrast, the reduction in output growth variability is mainly explained by reduced volatility of technology shocks.
Keywords: Monetary policy; great inflation; great moderation; equilibrium indeterminacy; generalized new Keynesian Phillips curve; Taylor rules; time-varying inflation target; good policy; good luck; sequential Monte Carlo
Rights: Copyright the authors
RMID: 0030085842
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Appears in Collections:Economics Working papers

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