Monetary Policy, Nominal Interest Rates, and Long-horizon Inflation Uncertainty
Wright, Stephen M.
Cambridge Working Papers in Economics
Faculty of Economics
MetadataShow full item record
Wright, S. M. (2004). Monetary Policy, Nominal Interest Rates, and Long-horizon Inflation Uncertainty. https://doi.org/10.17863/CAM.5035
Empirical evidence presented in this paper shows that the predictability of inflation at long horizons varies considerably across countries. Both simple theory and empirical evidence suggest that the crucial factor is the extent to which systematic monetary policy succeeds in stabilising the incipient unit root in inflation. The mechanism by which it does this appears, however, to be complicated by strong empirical evidence that nominal interest rates have real effects, which implies that monetary policy need not be so vigorous in reaction to inflation. This helps explain why inflation rates in the US and (especially) Germany have been relatively predictable, despite monetary policy rules which appear to have been barely stabilising. The paper also presents tentative evidence that the power of nominal interest rate effects is inversely related to long-horizon inflation uncertainty, and hence ultimately uncertainty about monetary policy.
Classification-JEL: C32, E32, E50, E52, Monetary policy, Nominal interest rates, Inflation uncertainty
This record's DOI: https://doi.org/10.17863/CAM.5035
All Rights Reserved
Licence URL: https://www.rioxx.net/licenses/all-rights-reserved/