Trend growth and learning about monetary policy rules
Mewael F. Tesfaselassie
Journal of Economic Dynamics and Control, 2014, vol. 41, issue C, 241-256
Abstract:
The paper examines the effect of trend productivity growth on the determinacy and learnability of equilibria under alternative monetary policy rules. Under zero trend inflation we show that the economic structure is isomorphic to that of Bullard and Mitra (2002) and show that under a policy rule that responds to current period inflation and output a higher trend growth rate relaxes the conditions for determinacy and learnability. Results are mixed for other policy rules. Under the expectations-based rule, trend growth tightens the conditions for determinacy but it relaxes the conditions for learnability. Under the lagged-data-based rule, trend growth tightens the conditions for determinacy and learnability. Our analysis shows that lower (higher) trend growth has similar effects as higher (lower) trend inflation in the sense of making inflation more (less) forward-looking. Thus, our results complement previous studies on the role of high trend inflation as a cause of macroeconomic volatility in the U.S. in the 1970s, as this period was also characterized by productivity growth slowdown.
Keywords: Trend growth; Learning; Monetary policy; Determinacy; Expectational stability (search for similar items in EconPapers)
JEL-codes: E4 E5 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (3)
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Working Paper: Trend growth and learning about monetary policy rules (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:41:y:2014:i:c:p:241-256
DOI: 10.1016/j.jedc.2014.02.001
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