NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Monetary Policy, Trend Inflation and the Great Moderation: An Alternative Interpretation

Olivier Coibion, Yuriy Gorodnichenko

NBER Working Paper No. 14621
Issued in December 2008
NBER Program(s):   EFG   ME

With positive trend inflation, the Taylor principle is not enough to guarantee a determinate equilibrium. We provide new theoretical results on restoring determinacy in New Keynesian models with positive trend inflation and combine these with new empirical findings on the Federal Reserve's reaction function before and after the Volcker disinflation to find that 1) while the Fed likely satisfied the Taylor principle in the pre-Volcker era, the US economy was still subject to self-fulfilling fluctuations in the 1970s, 2) the US economy moved from indeterminacy to determinacy during the Volcker disinflation, and 3) the switch from indeterminacy to determinacy was due to the changes in the Fed's response to macroeconomic variables and the decline in trend inflation during the Volcker disinflation.

download in pdf format
   (599 K)

email paper

This paper is available as PDF (599 K) or via email.

This paper was revised on December 5, 2011

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w14621

Published: Olivier Coibion & Yuriy Gorodnichenko, 2011. "Monetary Policy, Trend Inflation, and the Great Moderation: An Alternative Interpretation," American Economic Review, American Economic Association, vol. 101(1), pages 341-70, February. citation courtesy of

Users who downloaded this paper also downloaded these:
Kaminsky w14249 Crises and Sudden Stops: Evidence from International Bond and Syndicated-Loan Markets
Draca, Machin, and Van Reenen w13996 Minimum Wages and Firm Profitability
Heckman w9296 China's Investment in Human Capital
Benmelech and Bergman w13874 Collateral Pricing
Arkolakis w14214 Market Penetration Costs and the New Consumers Margin in International Trade
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us