Discussion Paper Details

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Title: Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory

Author(s): Richard Clarida, Jordi Galí and Mark Gertler

Publication Date: June 1998

Keyword(s): Business Cycles, monetary policy rules and sunspot fluctuations

Programme Area(s): International Macroeconomics

Abstract: We estimate a forward-looking monetary policy reaction function for the US economy, pre- and post-October 1979. Our results point to substantial differences in the estimated rule across periods. In particular, interest rate policy in the Volcker-Greenspan period appears to have been much more sensitive to changes in expected inflation than in the pre-Volcker period. We then compare some of the implications of the estimated rules for the equilibrium properties of inflation and output, using a simple macroeconomic model. The pre-Volcker rule is shown to be consistent with the possibility of persistent, self-fulfilling fluctuations in inflation and output.

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Bibliographic Reference

Clarida, R, Galí, J and Gertler, M. 1998. 'Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory'. London, Centre for Economic Policy Research.