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1 results

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

  • Nicolas Groshenny
  • Journal:
    Macroeconomic Dynamics / Volume 17 / Issue 6 / September 2013
    Published online by Cambridge University Press:
    02 October 2012, pp. 1311-1329

  • 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.