The paper re-examines whether the Federal Reserve's monetary policy was a source of instability during the Great In ‡ation by estimating a sticky-price model with positive trend in ‡ation, commodity price shocks and sluggish real wages. Our estimation provides empirical evidence for substantial wage-rigidity and …nds that the Federal Reserve responded aggressively to in ‡ation but negligibly to the output gap. In the presence of non-trivial real imperfections and well-identi…ed commodity price-shocks, U.S. data prefers a determinate version of the New Keynesian model: monetary policy-induced indeterminacy and sunspots were not causes of macroeconomic instability during the pre-Volcker era.

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Abstract This paper estimates a New Keynesian model of the U.S. economy over the period following the 2001 slump, a period for which the adequacy of monetary policy is intensely debated. To relate to this debate, we consider three alternative empirical in ‡ation series in the estimation. When using CPI or PCE, we …nd some support for the view that the Federal Reserve's policy was extra easy and may have led to equilibrium indeterminacy. Instead, when measuring in ‡ation with core PCE, monetary policy appears to have been reasonable and su¢ ciently active to rule out indeterminacy. We then relax the assumption that in ‡ation in the model is measured by a single indicator. We re-formulate the arti…cial economy as a factor model where the theory's concept of in ‡ation is the common factor to the three empirical in ‡ation series. We …nd that CPI and PCE provide better indicators of the latent concept while core PCE is less informative. Again, this procedure cannot dismiss indeterminacy. Terms of use: Documents in EconStor mayJEL codes E32, E52, E58.

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This paper estimates a New Keynesian model with trend in ‡ation and contrasts Taylor rules featuring …xed versus time-varying in ‡ation target while allowing for passive monetary policy. The estimation is conducted over the Great In ‡ation and the Great Moderation periods. Time-varying in ‡ation target empirically …ts better and active monetary policy prevails in both periods, thereby ruling out sunspots as an explanation of the Great In ‡ation episode. Counterfactual simulations suggest that the decline in in ‡ation volatility since the mid-1980s is mainly driven by monetary policy, while the reduction in output growth variability is explained by the reduced volatility of technology shocks.