Working Paper: CEPR ID: DP4675
Authors: Tamim Bayoumi; Silvia Sgherri
Abstract: This Paper proposes a markedly different transmission from monetary policy to the macroeconomy, focusing on how policy changes nominal inertia in the Phillips curve. Using recent theoretical developments, we examine the properties of a small, estimated US monetary model distinguishing four monetary regimes since the late 1950s. We find that changes in monetary policy are linked to shifts in nominal inertia, and that these improvements in supply-side flexibility are indeed the main channel through which monetary policy lowers the volatility of inflation and, even more importantly, output.
Keywords: inflation; monetary policy; rational expectation models
JEL Codes: E31; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Changes in monetary policy (E52) | Shifts in nominal inertia (E31) |
| Shifts in nominal inertia (E31) | Reduction in inflation volatility (E31) |
| Shifts in nominal inertia (E31) | Reduction in output volatility (E39) |
| Monetary stability (E63) | Reduction in inflation inertia (E31) |
| Reduction in inflation inertia (E31) | Improved supply responses (Q11) |
| Improved supply responses (Q11) | Output stabilization (E63) |
| Changes in monetary policy (E52) | Output stabilization (E63) |
| Changes in monetary policy (E52) | Reduction in inflation volatility (E31) |
| Changes in monetary policy (E52) | Reduction in output volatility (E39) |