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Revisiting the Great Moderation using the method of Indirect Inference

Minford, Patrick, Ou, Zhirong and Wickens, Michael 2013. Revisiting the Great Moderation using the method of Indirect Inference. [Working Paper]. Cardiff Economics Working Papers, Cardiff: Cardiff University.

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Abstract

We investigate the relative roles of monetary policy and shocks in causing the Great Moderation, using indirect inference where a DSGE model is tested for its ability to mimic a VAR describing the data. A New Keynesian model with a Taylor Rule and one with the Optimal Timeless Rule are both tested. The latter easily dominates, whether calibrated or estimated, implying that the Fed's policy in the 1970s was neither inadequate nor a cause of indeterminacy; it was both optimal and essentially unchanged during the 1980s. By implication it was largely the reduced shocks that caused the Great Moderation - among them monetary policy shocks the Fed injected into inflation.

Item Type: Monograph (Working Paper)
Date Type: Publication
Status: Published
Schools: Business (Including Economics)
Subjects: H Social Sciences > HB Economic Theory
Publisher: Cardiff University
Date of First Compliant Deposit: 30 March 2016
Last Modified: 21 May 2019 16:01
URI: http://orca.cf.ac.uk/id/eprint/77932

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