Keywords: Inflation, monetary policy, Phillips curve, volatility
Abstract: Since the early 1980s, the United States economy has changed in some important ways: Inflation now rises
considerably less when unemployment falls and the volatility of output and inflation have fallen sharply.
This paper examines whether changes in monetary policy can account for these phenomena. The results suggest
that changes in the parameters and shock volatility of monetary policy reaction functions can account
for most or all of the change in the inflation-unemployment relationship. As in other work, monetary-policy
changes can explain only a small portion of the output growth volatility decline. However, changes in policy
can explain a large proportion of the reduction in the volatility of the output gap. In addition, a broader
concept of monetary-policy changes--one that includes improvements in the central bank's ability to measure
potential output--enhances the ability of monetary policy to account for the changes in the economy.
Full paper (391 KB PDF)
Home | FEDS | List of 2004 FEDS papers
To comment on this site, please fill out our feedback form.
Last update: October 25, 2004