Working Paper: CEPR ID: DP4696
Authors: Tamim Bayoumi; Silvia Sgherri
Abstract: Extending recent theoretical contributions on sources of inflation inertia, we argue that monetary policy uncertainty helps determine the sluggish adjustment of expectations to nominal disturbances. Estimating a model in which rational individuals learn over time about shifts in US monetary policy and the Phillips curve, we find strong evidence that this link exists. These results question the standard approach for evaluating monetary rules by assuming unchanged private sector responses, help clarify the role of monetary stability in reducing output variability in the US and elsewhere, and tell a subtle and dynamic story of the interaction between monetary policy and the supply-side of the economy.
Keywords: Inflation Dynamics; Kalman Filter; Monetary Policy
JEL Codes: C51; E31; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| monetary policy uncertainty (E49) | inflation persistence (E31) |
| stable monetary policy (E63) | inflation inertia (E31) |
| stable monetary policy (E63) | supply-side response (E65) |
| Federal Reserve behavior (E52) | US economy improvements (O51) |
| monetary policy predictability (E60) | inflation inertia (E31) |