Economics Department

Working Papers in Economics

Art
<Previous Article Next Article>

TITLE:
Interest Rates, Inflation, and Federal Reserve Policy Since 1980

AUTHOR(S):
Peter N. Ireland, Boston College

DOCUMENT TYPE: Article

ABSTRACT:
This paper characterizes Federal Reserve policy since 1980 as one that actively manages short-term nominal interest rates in order to control inflation and evaluates this policy using a dynamic, stochastic, sticky-price model of the United States economy. The results show that the Fed's policy insulates aggregate output from the effects of exogenous demand-side disturbances and, by calling for a modest but persistent reduction in short-term interest rates following a positive technology shock, helps the economy to respond to supply-side disturbances as it would in the absence of nominal rigidities.