IMF Working Papers

Deconstructing the Art of Central Banking

By Tamim Bayoumi, Silvia Sgherri

October 1, 2004

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Tamim Bayoumi, and Silvia Sgherri. "Deconstructing the Art of Central Banking", IMF Working Papers 2004, 195 (2004), accessed April 23, 2025, https://doi.org/10.5089/9781451859942.001

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper proposes a markedly different transmission mechanism from monetary policy to the macroeconomy, focusing on how policy changes nominal inertia in the Phillips curve. Using recent theoretical developments, we examine the properties of a small, estimated U.S. monetary model distinguishing four monetary regimes employed since the late 1950s. We find that changes in monetary policy are linked to shifts in nominal inertia, and that these improvements in supply-side flexibility are indeed the main channel through which monetary policy lowers the volatility of inflation and, even more importantly, output.

Subject: Econometric analysis, Estimation techniques, Financial services, Inflation, Inflation targeting, Output gap, Prices, Production, Real interest rates

Keywords: Estimation techniques, Inflation, Inflation dynamics, Inflation inertia, Inflation uncertainty, Inflation volatility, Monetary policy, Monetary policy uncertainty, Output gap, Rational expectation models, Reaction function, Real interest rates, WP

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