Skip to main content Accessibility help

We use cookies to distinguish you from other users and to provide you with a better experience on our websites. Close this message to accept cookies or find out how to manage your cookie settings.

Close cookie message
×
Hostname: page-component-848d4c4894-hfldf Total loading time: 0 Render date: 2024-05-14T06:14:54.209Z Has data issue: false hasContentIssue false

5 - Policy and Aggregate Variability

Published online by Cambridge University Press:  10 August 2009

Jim Granato  and
M. C. Sunny Wong
Jim Granato
Affiliation:
University of Texas, Austin
M. C. Sunny Wong
Affiliation:
University of Southern Mississippi
Get access

Summary

This chapter solves the theoretical model in Chapter 4 and demonstrates the effects of the Taylor rule (adherence to the Taylor principle) on output and inflation stability. Our dynamic equilibrium model uses the interaction of policy (transmitted via interest rate movements) with temporary information coordination rigidities. A particular focus is on trade-offs between inflation and output volatility and on whether IOCS can exist. We also determine the possible trade-offs posed by various policy targets (hereafter termed crossover effects).

We evaluate the model outlined in Chapter 4 by conventional means. As McCallum (2001b) notes, standard evaluation practice occurs along the following lines:

The researcher specifies a quantitative macroeconomic model that is intended to be structural (invariant to policy changes) and consistent with both theory and data. Then, by stochastic simulation or analytical means, he [the researcher] determines how crucial variables (such as inflation and the output gap) behave on average under various alternative policy rules. Usually, rational expectations (RE) is assumed in both stages. Evaluation of the different outcomes can be accomplished by means of an optimal control exercise, or left to the judgment (i.e., loss function) of the implied policymaker (p. 258).

Feasibility

In this section we first determine whether policymakers can reach their desired levels (targets) in inflation and output. This step is basic for any further inquiry.

Type
Chapter
Information
The Role of Policymakers in Business Cycle Fluctuations , pp. 136 - 152
Publisher: Cambridge University Press
Print publication year: 2006

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Save book to Kindle

To save this book to your Kindle, first ensure coreplatform@cambridge.org is added to your Approved Personal Document E-mail List under your Personal Document Settings on the Manage Your Content and Devices page of your Amazon account. Then enter the ‘name’ part of your Kindle email address below. Find out more about saving to your Kindle.

Note you can select to save to either the @free.kindle.com or @kindle.com variations. ‘@free.kindle.com’ emails are free but can only be saved to your device when it is connected to wi-fi. ‘@kindle.com’ emails can be delivered even when you are not connected to wi-fi, but note that service fees apply.

Find out more about the Kindle Personal Document Service.

Available formats
×

Save book to Dropbox

To save content items to your account, please confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your account. Find out more about saving content to Dropbox.

Available formats
×

Save book to Google Drive

To save content items to your account, please confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your account. Find out more about saving content to Google Drive.

Available formats
×