Noisy information, interest rate shocks and the Great Moderation

Journal of Macroeconomics, 2011, vol. 33, issue 4, 568-581

Abstract: In this paper we evaluate the hypothesis that the Great Moderation is partly the result of a less activist monetary policy. We simulate a New Keynesian model in which the central bank can only observe a noisy estimate of the output gap and find that the less pronounced reaction of the Federal Reserve to output gap fluctuations since 1979 can account for a substantial part of the reduction in the standard deviation of GDP associated with the Great Moderation. Our simulations are consistent with the empirically documented smaller magnitude and impact of interest rate shocks since the early 1980s.

Keywords: Great Moderation; New Keynesian model; Noisy data (search for similar items in EconPapers)
JEL-codes: E32 E52 E58 (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (2)

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Working Paper: Noisy Information, Interest Rate Shocks and the Great Moderation (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:33:y:2011:i:4:p:568-581

DOI: 10.1016/j.jmacro.2011.08.004

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