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Title:Revisiting the great moderation using the method of indirect inference PDF Logo
Authors:Minford, Patrick
Ou, Zhirong
Issue Date:2012
Series/Report no.:Cardiff Economics Working Papers E2012/9
Abstract:We investigate the relative roles of monetary policy and shocks in causing the Great Moderation, using indirect inference where a DSGE model is tested for its ability to mimic a VAR describing the data. A New Keynesian model with a Taylor Rule and one with the Optimal Timeless Rule are both tested. The latter easily dominates, whether calibrated or estimated, implying that the Fed's policy in the 1970s was neither inadequate nor a cause of indeterminacy; it was both optimal and essentially unchanged during the 1980s. By implication it was largely the reduced shocks that caused the Great Moderation - among them monetary policy shocks the Fed injected into inflation.
Subjects:Great Moderation
Shocks
Monetary policy
Optimal Timeless Rule
Taylor Rule
Indirect Inference
Wald statistic
JEL:E42
E52
E58
Document Type:Working Paper
Appears in Collections:Cardiff Economics Working Papers, Cardiff Business School, Cardiff University

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