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What are monetary policy shocks?
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Qureshi, Irfan (2015) What are monetary policy shocks? Working Paper. Coventry: University of Warwick. Department of Economics. Warwick economics research papers series (WERPS) (1086). (Unpublished)
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Official URL: https://www2.warwick.ac.uk/fac/soc/economics/resea...
Abstract
I decompose deviations of the Federal funds rate from a Taylor type monetary policy rule into exogenous monetary policy shocks and a time-varying inflation target. I show that the role of exogenous shocks may be exaggerated in a fixed inflation target model, and a large fraction of business cycle fluctuations attributed to them may actually be due to changes in the inflation target. A time-varying inflation target explains approximately half of the volatility normally attributed to these deviations, and consequently more than a quarter of the fluctuations in the business cycle. This contributes approximately 39% additional inflation volatility during the Great Inflation. I show that shocks to the inflation target imply a lower sacrifice ratio compared to exogenous changes in the interest rate and therefore propose a gradual adjustment of the inflation target in order to achieve monetary policy objectives.
Item Type: | Working or Discussion Paper (Working Paper) | ||||
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Subjects: | H Social Sciences > HB Economic Theory | ||||
Divisions: | Faculty of Social Sciences > Economics | ||||
Library of Congress Subject Headings (LCSH): | Inflation (Finance), Monetary policy | ||||
Series Name: | Warwick economics research papers series (WERPS) | ||||
Publisher: | University of Warwick. Department of Economics | ||||
Place of Publication: | Coventry | ||||
ISSN: | 0083-7350 | ||||
Official Date: | December 2015 | ||||
Dates: |
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Number: | 1086 | ||||
Number of Pages: | 52 | ||||
Institution: | University of Warwick | ||||
Status: | Not Peer Reviewed | ||||
Publication Status: | Unpublished | ||||
Date of first compliant deposit: | 27 January 2016 | ||||
Funder: | Inflation (Finance), Monetary policy |
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