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• Woong Yong Park
  Seoul National University

   

A leading explanation for the Great Inflation and the subsequent Great Moderation in the post-war US economy is a systematic shift in monetary policy, from a passive to an active one. Much of the literature however relies on a common underlying assumption: there is little cross-sectional heterogeneity in price stickiness across goods. We find that, in an economy with a realistic cross-sectional distribution of the frequency of price changes (Nakamura and Steinsson 2008), i) the central bank can achieve a unique stable equilibrium with much weaker responses to inflation and ii) the systematic change in the policy rule observed in the data may have nothing to do with eliminating self-fulfilling driven fluctuations. This paper therefore provides a cautionary tale and urges researchers to interpret their results with a caution when their analysis is built on the (often implicit) homogenous-frequency assumption.