Monetary Policy, Nominal Interest Rates, and Long-Horizon Inflation Uncertainty

University of Cambridge DAE Working Paper No. 9820

44 Pages Posted: 27 Dec 1998

See all articles by Stephen H. Wright

Stephen H. Wright

Birkbeck College, University of London

Multiple version iconThere are 2 versions of this paper

Date Written: October 1998

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 stabilizing 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 reactions to inflation. This helps to explain why inflation rates in the U.S. and (especially) Germany have been relatively predictable, despite monetary policy rules which appear to have been barely stabilizing. 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.

JEL Classification: C32, E31, E50, E52

Suggested Citation

Wright, Stephen H., Monetary Policy, Nominal Interest Rates, and Long-Horizon Inflation Uncertainty (October 1998). University of Cambridge DAE Working Paper No. 9820, Available at SSRN: https://ssrn.com/abstract=138175 or http://dx.doi.org/10.2139/ssrn.138175

Stephen H. Wright (Contact Author)

Birkbeck College, University of London ( email )

Malet St
London, WC1 E7HX
United Kingdom

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