The Theoretical Model

TL;DRAbstract

Part I of this book provided some data, basic statistical analysis, and a focused historical account to highlight the link between inflation-stabilizing policy (related to the Taylor principle) and IOCS. We also showed a trade-off between interest rate volatility and IOCS. Still, the prior analyses are correlations between economic activity and policy instruments. We know these patterns are not the same as specifying a model that can identify causal relations between inflation-stabilizing policy and IOCS.

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