Monetary policy and macroeconomic stability revisited

Inflation Gap Persistence, Indeterminacy, and Monetary Policy

“…The probability of determinacy is zero in the pre-1979 period, whereas it is one in the post-1982 period. This feature corresponds with the results in the previous literature such as Lubik and Schorfheide (2004) and Hirose et al (2020).…”

“…These previous studies, however, have sidestepped the possibility of equilibrium indeterminacy, even though the existing literature, including Lubik and Schorfheide (2004) and Hirose et al (2020), estimates small-scale DSGE models while allowing for indeterminacy and shows that the US economy experienced indeterminacy in the pre-1979 period. As Lubik and Schorfheide (2004) and Fujiwara and Hirose (2014) indicate, indeterminacy can substantially alter the dynamic properties of models and the propagation of shocks.…”

“…See, e.g.,Cogley and Sbordone (2008),Benati and Surico (2008),Cogley et al (2010), andAscari and Sbordone (2014).2Carlstrom et al (2009) andDavig and Doh (2014) highlight changes in the relative importance of shocks in addition to a more aggressive monetary policy response to the inflation gap Fuhrer (2011). stresses the role of intrinsic inflation inertia in Phillips curves for inflation (gap) persistence.3 For the evidence, see, e.g.,Lubik and Schorfheide (2004) andHirose et al (2020).4 Fujiwara andHirose (2014) show that equilibrium indeterminacy can generate more persistent dynamics that improves the forecastability of inflation in a DSGE model, compared with the case of determinacy.…”

Monetary Policy, Self-Fulfilling Expectations and the U.S. Business Cycle

“…In line with the work of Kiley (2007), Ascari and Ropele (2009), Coibon and Gorodnichenko (2011), Hirose et al (2017), andHaque et al (2019) among others, studies on the conduct of monetary policy would need to account for the positive trend inflation observed in the U.S. macroeconomic history. While the findings of these papers are based on parsimonious models, Arias et al (2019) transparently describe the difficulties of including such analysis in the context of a medium-scale model, and possible extensions of the current work could help overcome such obstacles.…”

A Growth-Augmented Phillips Curve

“…For example, a more forceful response of monetary policy to fluctuations in output growth could dampen such fluctuations relative to the movements in inflation, thereby increasing the estimated elasticity of inflation with respect to output growth. Empirical estimates of the Federal Reserve's interest rate policy rule indicate that its policy response to output growth has increased and that its policy response to the output gap has declined since the mid-1980s (Coibion and Gorodnichenko, 2011;Hirose, Kurozumi, and Van Zandweghe, 2020). McLeay and Tenreyro (2020) show that the conduct of monetary policy affects the empirical estimate of the slope of the Phillips curve.…”