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INTERNATIONAL GREAT INFLATION AND COMMON MONETARY POLICY

  • Jacek Suda (a1) and Anastasia S. Zervou (a2)
Abstract

We study whether monetary authorities in the G7 countries were changing their responses to inflation in a similar manner during and following the Great Inflation era. We find that the common to the G7 countries inflation pattern during the Great Inflation period could be associated with a common pattern in the monetary policy response to inflation: we find that until the early 1980s monetary authorities in the G7 countries responded mildly to inflation, systematically fought it throughout the 1980s and lessened again their response during the 2000s. The estimated Taylor rule coefficients on inflation are co-integrated, implying the existence of a long-run relationship in the responses to inflation during and after the Great Inflation period. At the same time, principal component analysis of the residuals of the estimated Taylor rules indicates that the shocks' structure cannot account enough for the monetary policies' co-movements. We interpret these findings as suggestive of common monetary policy patterns.

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Corresponding author
Address correspondence to: Anastasia S. Zervou, Texas A&M University, 4228 TAMU, College Station, TX 77843, USA; e-mail: azervou@tamu.edu.
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We are very grateful to James Morley for his direction and support. We are very grateful to Chang-Jin Kim for sharing computer routines. We also thank James Bullard, Anindya Banerjee, Siddhartha Chib, Yunjong Eo, Anna Mikusheva, Athanasios Orphanides, B. Ravikumar, Barbara Rossi, Aarti Singh, Thanasis Stengos, the editor, two referees, participants of seminars at the University of Houston, Texas A&M University, Banque de France, Bank of Netherlands, Tilburg University, the Midwest Macroeconomics Conference, the Conference on Computing in Economics and Finance, the 15th Texas Camp Econometrics, the 8th Conference on Research on Economic Theory & Econometrics and the Midwest Econometric Group for helpful comments.

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Macroeconomic Dynamics
  • ISSN: 1365-1005
  • EISSN: 1469-8056
  • URL: /core/journals/macroeconomic-dynamics
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