MONETARY POLICY, INFLATION AND UNEMPLOYMENT: IN DEFENSE OF THE FEDERAL RESERVE

Nicolas Groshenny
2012 Macroeconomic Dynamics  
To what extent have monetary policy shocks been helpful at stabilizing in ‡ation and unemployment? To address this question, I employ Bayesian techniques and post-1984 U.S. data to estimate a medium-scale DSGE model with labor market frictions. I use the estimated model to back out the time series of the shocks that have hit the U.S. economy over the period 1985:Q1 -2009:Q4 as well as the path of the natural rate of unemployment. Historical decompositions of the model-consistent unemployment
more » ... ent unemployment gap emphasize the expansionary e¤ects of monetary policy shocks during each of the three recessions embedded in the sample period. In counterfactual experiments where the estimated monetary policy disturbances are turned o¤, the unemployment gap becomes signi...cantly more volatile and the U.S. economy enters de ‡ation in 2002 and again in 2008. These results therefore suggest that the non-systematic component of monetary policy contributed materially to enhancing macroeconomic stability during the last decade.
doi:10.1017/s1365100512000053 fatcat:gui3wn26m5cd5kmtujgrhdaqdi