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MONETARY POLICY, INFLATION AND UNEMPLOYMENT: IN DEFENSE OF THE FEDERAL RESERVE

Published online by Cambridge University Press:  02 October 2012

Nicolas Groshenny
Nicolas Groshenny*
Affiliation:
Reserve Bank of New Zealand and CAMA
*
Address correspondence to: Nicolas Groshenny, Reserve Bank of New Zealand, Economics Department, Research Team, 2 The Terrace, 6011 Wellington, New Zealand; e-mail: nicolas.groshenny@rbnz.govt.nz.
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Abstract

To what extent did deviations from the Taylor rule between 2002 and 2006 help to promote price stability and maximum sustainable employment? To address that question, I estimate a New Keynesian model with unemployment and perform a counterfactual experiment where monetary policy strictly follows a Taylor rule over the period 2002:Q1–2006:Q4. I find that such a policy would have generated a sizeable increase in unemployment and resulted in an undesirably low rate of inflation. Around mid-2004, when the counterfactual deviates the most from the actual series, the model indicates that the probability of an unemployment rate greater than 8% would have been as high as 80%, whereas the probability of an inflation rate above 1% would have been close to zero.

Keywords

Business Cycle ModelsInflationUnemploymentTaylor Rules
Type
Articles
Information
Macroeconomic Dynamics , Volume 17 , Special Issue 6: Equality, Public Insurance, and Monetary Policy , September 2013 , pp. 1311 - 1329
Copyright
Copyright © Cambridge University Press 2012 

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