liu_07

Emory University
Department of Economics
Working Papers

Title: Asymmetric Expectation Effects of Regime Shifts and the Great Moderation

Number: 07-12

Author: Zheng Liu, Daniel F. Waggoner and Tao Zha

Issue Date: July 2007

Abstract: The possibility of regime shifts in monetary policy can have important effects on rational agents' expectation formation and equilibrium dynamics. In a DSGE model where the monetary policy rule switches between a bad regime that accommodates inflation and a good regime that stabilizes inflation, the expectation effect is asymmetric across regimes. Such an asymmetric effect makes it difficult, but still possible, to generate substantial reductions in the volatilities of inflation and output as the monetary policy switches from the bad regime to the good regime.

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Title:	Asymmetric Expectation Effects of Regime Shifts and the Great Moderation
Number:	07-12
Author:	Zheng Liu, Daniel F. Waggoner and Tao Zha
Issue Date:	July 2007
Abstract:	The possibility of regime shifts in monetary policy can have important effects on rational agents' expectation formation and equilibrium dynamics. In a DSGE model where the monetary policy rule switches between a bad regime that accommodates inflation and a good regime that stabilizes inflation, the expectation effect is asymmetric across regimes. Such an asymmetric effect makes it difficult, but still possible, to generate substantial reductions in the volatilities of inflation and output as the monetary policy switches from the bad regime to the good regime.