Endogenous Monetary Policy Regimes and the Great Moderation

39 Pages Posted: 19 May 2010

See all articles by Ana Beatriz Galvão

Ana Beatriz Galvão

Bloomberg Economics; University of Warwick - Warwick Business School

Massimiliano Giuseppe Marcellino

Bocconi University - Department of Economics; Centre for Economic Policy Research (CEPR)

Date Written: May 2010

Abstract

This paper contributes to the literature on the changing transmission mechanism of monetary policy by introducing a model whose parameter evolution explicitly depends on the conduct of monetary policy. We find that the model fits the data well, in particular when complemented with an estimated break around 1985 that could be associated with the re-gained credibility of the central bank. The responses of output and inflation to policy shocks change not only because of the break in 1985 but also according to the monetary policy stance: policy shocks have stronger negative effects when policy is tight. There is also evidence in favour of large changes in the volatility of the output equation, but not of inflation. A set of counterfactual experiments indicate that good policy and good luck contributed to the "great moderation", but neither of them can fully explain it. A more general variation in the model dynamics underlying the shock transmission mechanism is required.

Keywords: great moderation, impulse responses, monetary policy, time-varying models

JEL Classification: C51, E52

Suggested Citation

Galvão, Ana Beatriz and Marcellino, Massimiliano, Endogenous Monetary Policy Regimes and the Great Moderation (May 2010). CEPR Discussion Paper No. DP7827, Available at SSRN: https://ssrn.com/abstract=1611522

Ana Beatriz Galvão (Contact Author)

Bloomberg Economics ( email )

3 Queen Victoria Street
London, EC4N 4TQ
United Kingdom

HOME PAGE: http://https://sites.google.com/site/anabgalvao/

University of Warwick - Warwick Business School ( email )

Coventry CV4 7AL
United Kingdom

Massimiliano Marcellino

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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