Inflation, Unemployment, and the Time Consistency of the US Monetary Policy
16 Pages Posted: 30 Oct 2008
Date Written: October 29, 2008
This paper verifies the performance of the Barro and Gordon (1983) model to explain the US inflation since the early 1950's. We divide the period from 1951:2 to 2005:2 according to each chairman of the Federal Reserve (FED). In addition, we consider aggregated periods, represented by pre-, post-Volcker, and whole sample. A genetic algorithm of stochastic search is applied to reduce the sensitivity of the maximum likelihood estimator to the initial parameter values. Surprisingly, our results show that the time consistency problem explains the US inflation during the Greenspan chairmanship at the FED.
Keywords: Time consistency, Unemployment, Inflation
JEL Classification: E52, E58
Suggested Citation: Suggested Citation