Working Paper: NBER ID: w13542
Authors: Jordi Gal; Mark Gertler
Abstract: We describe some of the main features of the recent vintage macroeconomic models used for monetary policy evaluation. We point to some of the key differences with respect to the earlier generation of macro models, and highlight the insights for policy that these new frameworks have to offer. Our discussion emphasizes two key aspects of the new models: the significant role of expectations of future policy actions in the monetary transmission mechanism, and the importance for the central bank of tracking of the flexible price equilibrium values of the natural levels of output and the real interest rate. We argue that both features have important implications for the conduct of monetary policy.
Keywords: Macroeconomic Models; Monetary Policy; Expectations; Natural Rate
JEL Codes: E31; E32; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| management of expectations (D84) | effectiveness of monetary policy (E52) |
| private sector expectations of future policy actions (E69) | current economic activity (E20) |
| central bank's ability to manage expectations (E58) | overall effectiveness in achieving monetary policy goals (E52) |
| deviations from natural flexible price equilibrium values of output (D59) | inflationary or deflationary pressures (E31) |
| expectations (D84) | aggregate output (E10) |
| expectations (D84) | inflation (E31) |
| economic conditions (E66) | adjustment of interest rates (E43) |