Monetary policy and indeterminacy after the 2001 slump

Abstract

This paper estimates a New Keynesian model of the U.S. economy over the period following the 2001 slump, a period for which the adequacy of monetary policy is intensely debated. We nd that only when measuring in ation with core PCE does monetary policy appear to have been reasonable and su¢ ciently active to rule out indeterminacy. We then relax the assumption that in ation in the model is measured by a single indicator and re-formulate the arti cial economy as a factor model where the theory s concept of in ation is the common factor to the empirical in ation series. CPI and PCE provide better indicators of the latent concept while core PCE is less informative. Finally, we estimate an economy that distinguishes between core and headline in ation rates. This model comfortably rules out indeterminacy.