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Monetary policy and indeterminacy after the 2001 slump

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  • Doko Tchatoka, Firmin
  • Groshenny, Nicolas
  • Haque, Qazi
  • Weder, Mark
Abstract
This paper estimates a simple New Keynesian model of the U.S. economy, allowing for indeterminacy, over the period following the 2001 slump, an episode for which the adequacy of monetary policy is intensely debated. We find that only when measuring inflation with core PCE does monetary policy appear to have been sufficiently active to rule out indeterminacy. We then relax the assumption that inflation in the model is measured by a single indicator and re-formulate the artificial economy as a factor model where the theory’s concept of inflation is the common factor to the empirical inflation series. CPI and PCE provide better indicators of the latent concept while core PCE is less informative. Finally, we estimate an extended economy that distinguishes between core and headline inflation rates. This model comfortably rules out indeterminacy and confirms the view that the Federal Reserve put more weight on core PCE inflation when setting the policy rate during this period.

Suggested Citation

  • Doko Tchatoka, Firmin & Groshenny, Nicolas & Haque, Qazi & Weder, Mark, 2017. "Monetary policy and indeterminacy after the 2001 slump," Journal of Economic Dynamics and Control, Elsevier, vol. 82(C), pages 83-95.
    • Handle: RePEc:eee:dyncon:v:82:y:2017:i:c:p:83-95
    DOI: 10.1016/j.jedc.2017.05.003
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    Cited by:

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    2. Belongia, Michael T. & Ireland, Peter N., 2016. "The evolution of U.S. monetary policy: 2000–2007," Journal of Economic Dynamics and Control, Elsevier, vol. 73(C), pages 78-93.
    3. Yasuo Hirose & Takushi Kurozumi & Willem Van Zandweghe, 2020. "Monetary Policy and Macroeconomic Stability Revisited," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 37, pages 255-274, July.
    4. Castelnuovo, Efrem & Pellegrino, Giovanni, 2018. "Uncertainty-dependent effects of monetary policy shocks: A new-Keynesian interpretation," Journal of Economic Dynamics and Control, Elsevier, vol. 93(C), pages 277-296.
    5. Haque, Qazi & Groshenny, Nicolas & Weder, Mark, 2021. "Do we really know that U.S. monetary policy was destabilizing in the 1970s?," European Economic Review, Elsevier, vol. 131(C).
    6. repec:zbw:bofrdp:2019_020 is not listed on IDEAS
    7. Qazi Haque, 2022. "Monetary Policy, Inflation Target, and the Great Moderation: An Empirical Investigation," International Journal of Central Banking, International Journal of Central Banking, vol. 18(4), pages 1-52, October.
    8. Hirose, Yasuo, 2020. "An Estimated Dsge Model With A Deflation Steady State," Macroeconomic Dynamics, Cambridge University Press, vol. 24(5), pages 1151-1185, July.
    9. Qazi Haque, 2017. "Monetary Policy, Target Inflation and the Great Moderation: An Empirical Investigation," School of Economics and Public Policy Working Papers 2017-10, University of Adelaide, School of Economics and Public Policy.
    10. Aymeric Ortmans, 2020. "Evolving Monetary Policy in the Aftermath of the Great Recession," Documents de recherche 20-01, Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne.
    11. Wu, Ping, 2024. "Should I open to forecast? Implications from a multi-country unobserved components model with sparse factor stochastic volatility," International Journal of Forecasting, Elsevier, vol. 40(3), pages 903-917.

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    More about this item

    Keywords

    Indeterminacy; Taylor rules; Great deviation;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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