Giovanni Nicolò (UCLA)
"Monetary Policy, Expectations and Business Cycles in the U.S. Post-War Period"
This paper examines the interactions between monetary policy and the formation of expectations to explain U.S. business cycle fluctuations in the post-war period. I estimate a conventional medium-scale New-Keynesian model, in which I relax the assumption that the central pursued an 'active' monetary policy -- i.e. that stabilizes inflation and output growth -- over this entire period. I find that between 1955 and 1979 monetary policy was 'passive,' and structural shocks de-anchored inflation expectations from the central bank's long-run target. Fundamental productivity and cost shocks were the primary cause of volatility and propagated via persistent self-fulfilling inflationary expectations. By contrast, non-fundamental 'sunspot' shocks, caused by unexpected changes in inflation expectations, were insignificant sources of uncertainty.