Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/17869
Authors: 
Liu, Zheng
Waggoner, Daniel F.
Zha, Tao
Year of Publication: 
2007
Series/Report no.: 
Kiel Working Paper 1357
Abstract: 
We assess the quantitative importance of expectation effects of regime shifts in monetary policy in a DSGE model that allows the monetary policy rule to switch between a ?bad? regime and a ?good? regime. When agents take into account such regime shifts in forming expectations, the expectation effect is asymmetric. In the good regime, the expectation effect is small despite agents' disbelief that the regime will last forever. In the bad regime, however, the expectation effect on equilibrium dynamics of inflation and output is quantitatively important, even if agents put a small probability that monetary policy will switch to the good regime. Although the expectation effect dampens aggregate fluctuations in the bad regime, a switch from the bad regime to the good regime can still substantially reduce the volatility of both inflation and output, provided that we allow some ?reduced-form? parameters in the private sector to change with monetary policy regime.
Subjects: 
Structural breaks
inflation persistence
macroeconomic volatility
expectations-formation mechanism
monetary policy regime
JEL: 
E52
E31
E32
Document Type: 
Working Paper

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