Working Paper: NBER ID: w17090
Authors: Lieven Baele; Geert Bekaert; Seonghoon Cho; Koen Inghelbrecht; Antonio Moreno
Abstract: We estimate a New-Keynesian macro model accommodating regime-switching behavior in monetary policy and in macro shocks. Key to our estimation strategy is the use of survey-based expectations for inflation and output. We identify accommodating monetary policy before 1980, with activist monetary policy prevailing most but not 100% of the time thereafter. Systematic monetary policy switched to the activist regime in the 2000-2005 period through an aggressive lowering of interest rates. Discretionary policy spells became less frequent since 1985, but the Volcker period is identified as a discretionary period. Output shocks shift to the low volatility regime around 1985 whereas inflation shocks do so only around 1990, suggesting active monetary policy may have played role in anchoring inflation expectations. Shocks and policy regimes jointly drive the volatility of the macro variables. We provide new estimates of the onset and demise of the Great Moderation and the relative role played by macro-shocks and monetary policy.
Keywords: Macroeconomic Regimes; Monetary Policy; Great Moderation; New-Keynesian Model
JEL Codes: C42; C53; E31; E32; E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| shift in systematic monetary policy to an activist regime (E63) | change in volatility of output and inflation shocks (E39) |
| active monetary policy (E63) | stabilizing inflation expectations (E31) |
| aggressive monetary policy in the 1980s (E65) | lower variability in inflation (E31) |
| aggressive monetary policy in the 1980s (E65) | lower variability in output (C29) |
| end of the great moderation (E32) | return to higher volatility in macroeconomic outcomes (E32) |
| output shocks transitioned to a low volatility regime around 1985 (E32) | change in macroeconomic volatility (E39) |
| inflation shocks transitioned to a low volatility regime around 1990 (E31) | change in macroeconomic volatility (E39) |
| systematic monetary policy and changes in the variance of economic shocks (E39) | great moderation (Z12) |