Monetary policy adapts to economic conditions, impacting interest rates dynamically.
The article explores how monetary policy changes in response to different economic conditions. Researchers use a threshold model to identify when policy becomes more active based on inflation and unemployment levels. They find that the Federal Reserve responds differently to low and high inflation periods, adjusting interest rates more rapidly in high inflation times. The study also examines how policy operates during periods of high inflation and unemployment, known as "stagflation", and whether responses to increases and decreases in key variables are equal.