Monetary Policy, Nominal Interest Rates, and Long-horizon Inflation Uncertainty
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Authors
Wright, Stephen M.
Publication Date
2004-06-16Series
Cambridge Working Papers in Economics
Publisher
Faculty of Economics
Language
en_GB
Type
Working Paper
Metadata
Show full item recordCitation
Wright, S. M. (2004). Monetary Policy, Nominal Interest Rates, and Long-horizon Inflation Uncertainty. https://doi.org/10.17863/CAM.5035
Abstract
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.
Keywords
Classification-JEL: C32, E32, E50, E52, Monetary policy, Nominal interest rates, Inflation uncertainty
Identifiers
This record's DOI: https://doi.org/10.17863/CAM.5035
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