New Economy - New Policy Rules?

J. Bullard, E. Schaling

    Research output: Working paperDiscussion paperOther research output

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    Abstract

    The U.S. economy appears to have experienced a pronounced shift toward higher productivity over the last five years or so. We wish to understand the implications of such shifts for the structure of optimal monetary policy rules in simple dynamic economies. Accordingly, we begin with a standard economy in which a version of the Taylor rule constitutes the optimal monetary policy for a given inflation target and a given level of productivity. We augment this model with regime switching in productivity, and calculate the optimal monetary policy rule in the altered environment. We find that in the altered environment, a rule that incorporates leading indicators about regimes significantly outperforms the Taylor rule. We use this result to comment on the "new economy" events of the 1990s and the "stagflation" events of the 1970s from the perspective of our model.
    Original languageEnglish
    Place of PublicationTilburg
    PublisherVakgroep CentER
    Number of pages20
    Volume2000-72
    Publication statusPublished - 2000

    Publication series

    NameCentER Discussion Paper
    Volume2000-72

    Fingerprint

    Productivity
    Policy rules
    New economy
    Optimal monetary policy rules
    Taylor rule
    Optimal monetary policy
    Regime switching
    US economy
    Leading indicators
    Inflation target
    Stagflation

    Keywords

    • inflation targets
    • strutural change
    • monetary policy rules
    • new economy
    • regime switching

    Cite this

    Bullard, J., & Schaling, E. (2000). New Economy - New Policy Rules? (CentER Discussion Paper; Vol. 2000-72). Tilburg: Vakgroep CentER.
    Bullard, J. ; Schaling, E. / New Economy - New Policy Rules?. Tilburg : Vakgroep CentER, 2000. (CentER Discussion Paper).
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    Bullard, J & Schaling, E 2000 'New Economy - New Policy Rules?' CentER Discussion Paper, vol. 2000-72, Vakgroep CentER, Tilburg.

    New Economy - New Policy Rules? / Bullard, J.; Schaling, E.

    Tilburg : Vakgroep CentER, 2000. (CentER Discussion Paper; Vol. 2000-72).

    Research output: Working paperDiscussion paperOther research output

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    N2 - The U.S. economy appears to have experienced a pronounced shift toward higher productivity over the last five years or so. We wish to understand the implications of such shifts for the structure of optimal monetary policy rules in simple dynamic economies. Accordingly, we begin with a standard economy in which a version of the Taylor rule constitutes the optimal monetary policy for a given inflation target and a given level of productivity. We augment this model with regime switching in productivity, and calculate the optimal monetary policy rule in the altered environment. We find that in the altered environment, a rule that incorporates leading indicators about regimes significantly outperforms the Taylor rule. We use this result to comment on the "new economy" events of the 1990s and the "stagflation" events of the 1970s from the perspective of our model.

    AB - The U.S. economy appears to have experienced a pronounced shift toward higher productivity over the last five years or so. We wish to understand the implications of such shifts for the structure of optimal monetary policy rules in simple dynamic economies. Accordingly, we begin with a standard economy in which a version of the Taylor rule constitutes the optimal monetary policy for a given inflation target and a given level of productivity. We augment this model with regime switching in productivity, and calculate the optimal monetary policy rule in the altered environment. We find that in the altered environment, a rule that incorporates leading indicators about regimes significantly outperforms the Taylor rule. We use this result to comment on the "new economy" events of the 1990s and the "stagflation" events of the 1970s from the perspective of our model.

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    KW - new economy

    KW - regime switching

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    Bullard J, Schaling E. New Economy - New Policy Rules? Tilburg: Vakgroep CentER. 2000. (CentER Discussion Paper).