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Working Paper

Monetary Policy Regimes and Beliefs

This paper investigates the role of beliefs over monetary policy in propagating the effects of monetary policy shocks within the context of a dynamic, stochastic general equilibrium model. In this model, monetary policy periodically switches between low- and high-money-growth regimes.When individuals cannot observe the regime directly, they must draw inferences over regime type based on historical money growth rates.The authors show that for an empirically plausible money growth process, beliefs evolve slowly in the wake of a regime change.As a result, their model is able to capture some of the observed persistence of real and nominal variables following such a regime change.

Suggested Citation

Andolfatto, David, and Paul Gomme. 1999. “Monetary Policy Regimes and Beliefs.” Federal Reserve Bank of Cleveland, Working Paper No. 99-05.