Working Paper: CEPR ID: DP18438
Authors: Davide Debortoli; Mario Forni; Luca Gambetti; Luca Sala
Abstract: We measure the inflation-unemployment tradeoff associated with monetary easing and tightening, during booms and recessions, using a novel nonlinear Proxy-SVAR approach. We find evidence of significant non-linearities for the U.S. economy (1973:M1 - 2019:M6): stimulating economic activity during recessions is associated with minimal costs in terms of inflation, and reducing inflation during booms delivers small costs in terms of unemployment. Overall, these results provide support for countercyclical monetary policies, in contrast with what predicted by a flat Phillips curve, or previous studies on nonlinear effects of monetary policy. Our results can be rationalized by a simple model with downward nominal wage rigidity, which is also used to assess the validity of our empirical approach.
Keywords: monetary policy; inflation-unemployment tradeoff; structural VAR models; proxy SVAR
JEL Codes: C32; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| monetary easing during recessions (E52) | decline in unemployment (J64) |
| decline in unemployment (J64) | favorable inflation-unemployment tradeoff (E31) |
| reducing inflation during booms (E31) | increase in unemployment (J64) |
| monetary shocks (E39) | inflation-unemployment tradeoff (E31) |
| natural rate of unemployment is orthogonal to monetary shocks (E39) | identification of monetary tradeoff (E49) |