Monetary Policy, Trend Inflation, and the Great Moderation: An Alternative Interpretation: Comment Based on System Estimation

By Willem Van Zandweghe, Assistant Vice President and Economist , Yasuo Hirose and Takushi Kurozumi


  Download paper, RWP 15-17, December 2015

What caused the U.S. economy's shift from the Great Inflation era to the Great Moderation era? A large literature shows that the shift was achieved by the change in monetary policy from a passive to an active response to inflation. However, Coibion and Gorodnichenko (2011) attribute the shift to a fall in trend inflation along with the policy change, based on a solely estimated Taylor rule and a calibrated staggered-price model. We estimate the Taylor rule and the staggered-price model jointly and demonstrate that the change in monetary policy responses to inflation and other variables suffices for explaining the shift.

JEL Classification: C11; E31; E52

Article Citation

  • Hirose, Yasuo, Takushi Kurozumi and Willem Van Zandweghe. 2015. “Monetary Policy, Trend Inflation, and the Great Moderation: An Alternative Interpretation: Comment Based on System Estimation,” Federal Reserve Bank of Kansas City, working paper no. 15-17, December, available at https://doi.org/10.18651/RWP2015-17

Related Research

  • Clarida, Richard, Jordi Gali and Mark Gertler. 2000. “Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory,” Quarterly Journal of Economics 115(1), 147-180. Available at: https://doi.org/10.1162/003355300554692
  • Coibion, Olivier and Yuriy Gorodnichenko. 2011. “Monetary Policy, Trend Inflation, and the Great Moderation: An Alternative Interpretation,” American Economic Review 101(1), 341-370. Available at: https://doi.org/10.1257/aer.101.1.341
  • Lubik, Thomas A. and Frank Schorfheide. 2004. “Testing for Indeterminacy: An Application to U.S. Monetary Policy,” American Economic Review 94(1), 190-217. Available at: https://doi.org/10.1257/000282804322970760

About the Author

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Willem Van Zandweghe conducts research on business fluctuations, inflation dynamics, and monetary policy. Read his bio.