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Noisy Information, Interest Rate Shocks and the Great Moderation

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  • Eric Mayer
  • Johann Scharler

Abstract

In this paper we quantitatively evaluate the hypothesis that the Great Moderation is partly the result of a less activist monetary policy. We simulate a New Keynesian model where the central bank can only observe a noisy estimate of the output gap and fnd that the less pronounced reaction of the Federal Reserve to output gap uctuations since 1979 can account for half of the reduction in the standard deviation of GDP associated with the Great Moderation. Our simulations are consistent with the empirically documented smaller magnitude and impact of interest rate shocks since the early 1980s.

Suggested Citation

  • Eric Mayer & Johann Scharler, 2010. "Noisy Information, Interest Rate Shocks and the Great Moderation," Economics working papers 2010-07, Department of Economics, Johannes Kepler University Linz, Austria.
    • Handle: RePEc:jku:econwp:2010_07
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    Cited by:

    1. Liu, Dayu & Xu, Ning & Zhao, Tingting & Song, Yang, 2018. "Identifying the nonlinear correlation between business cycle and monetary policy rule: Evidence from China and the U.S," Economic Modelling, Elsevier, vol. 73(C), pages 45-54.
    2. Bofinger, Peter & Debes, Sebastian & Gareis, Johannes & Mayer, Eric, 2011. "Animal spirits and credit spreads in a model with a cost channel," VfS Annual Conference 2011 (Frankfurt, Main): The Order of the World Economy - Lessons from the Crisis 48688, Verein für Socialpolitik / German Economic Association.

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    More about this item

    Keywords

    Great Moderation; New Keynesian Model; Noisy Data;
    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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