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Inflation Gap Persistence, Indeterminacy, and Monetary Policy

Author

Listed:
  • Yasuo Hirose

    (Keio University)

  • Takushi Kurozumi

    (Bank of Japan)

  • Wille Van Zandweghe

    (Federal Reserve Bank of Cleveland)

Abstract

Empirical literature has documented that the persistence of the gap between inflation and its trend declined after the Volcker disinflation. Previous studies into the source of the decline in inflation gap persistence have offered competing views while sidestepping the possibility of equilibrium indeterminacy. We examine the source of the decline by estimating a medium-scale dynamic stochastic general equilibrium model using Bayesian methods that allow for indeterminacy. We show that the Fed's change from a passive to an active policy response to the inflation gap or a decrease in firms' probability of price change can fully account for the decline in inflation gap persistence by ruling out indeterminacy that induces persistent economic dynamics. (Copyright: Elsevier)

Suggested Citation

  • Yasuo Hirose & Takushi Kurozumi & Wille Van Zandweghe, 2023. "Inflation Gap Persistence, Indeterminacy, and Monetary Policy," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 51, pages 867-887, December.
    • Handle: RePEc:red:issued:23-43
    DOI: 10.1016/j.red.2023.08.007
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    More about this item

    Keywords

    Trend inflation; Predictability; Equilibrium indeterminacy; Active monetary policy; Non-CES aggregator;
    All these keywords.

    JEL classification:

    • C26 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Instrumental Variables (IV) Estimation
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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