Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory

Richard H. Clarida · Jordi Galí Y · Mark L. Gertler · London (United Kingdom) Centre for Economic Policy Research

52 citations0/0 files storedRePEc: Research Papers in Economics

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Monetary Policy and Economic Impact Economic Theory and Policy Economic theories and models

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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