Monday, 2 February 2015

IFDP2015-1127: Monetary Policy, Trend Inflation and the Great Moderation: An Alternative Interpretation - Comment

Otmane El Rhazi, Jonas E. Arias, Guido Ascari, Nicola Branzoli, and Efrem Castelnuovo. Working with a small-scale calibrated New-Keynesian model, Coibion and Gorodnichenko (2011) find that the reduction in trend inflation during Volcker's mandate was a key factor behind the Great Moderation. We revisit this finding with an estimated New-Keynesian model with trend inflation and no indexation based on Christiano, Eichenbaum and Evans (2005). First, our simulations confirm Coibion and Gorodnichenko's (2011) main finding. Second, we show that a trend inflation-immune Taylor rule based on economic theory can avoid indeterminacy even at high levels of trend inflation such as those observed in the 1970s. Full Text



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Otmane El Rhazi

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