Asset Market Participation, Monetary Policy Rules, and the Great Inflation

Details

Serval ID
serval:BIB_CB22149F5543
Type
Article: article from journal or magazin.
Collection
Publications
Title
Asset Market Participation, Monetary Policy Rules, and the Great Inflation
Journal
Review of Economics and Statistics
Author(s)
Bilbiie F.O., Straub R.
ISSN
0034-6535
1530-9142
Publication state
Published
Issued date
05/2013
Peer-reviewed
Oui
Volume
95
Number
2
Pages
377-392
Language
english
Abstract
This paper argues that limited asset market participation is crucial in explaining
U.S. macroeconomic performance and monetary policy before the 1980s, and their
changes thereafter. We develop an otherwise standard sticky-price DSGE model,
whereby at low enough asset market participation, standard aggregate demand logic
is inverted: interest rate increases become expansionary. Thereby, a passive monetary
policy rule ensures equilibrium determinacy and maximizes welfare, suggesting that
Federal Reserve policy in the pre-Volcker era was better than conventional wisdom
suggests. We provide empirical evidence consistent with this hypothesis, and study
the relative merits of changes in structure and shocks for reproducing the conquest of
the Great Inflation and the Great Moderation.
Keywords
Great Inflation, Great Moderation, Limited asset markets participation, Passive monetary policy rules, Aggregate demand, Real (in)determinacy, Bayesian estimation.
Create date
01/11/2018 8:14
Last modification date
20/08/2019 15:45
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