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Revealed Preference of the Federal Reserve: Using Inverse-Control Theory to Interpret the Policy Equation of a Vector Autoregression

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  • Salemi, Michael K
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    Abstract

    How close is observed Federal Reserve policy to policy that would be optimal in the control theory sense? This question is addressed by using an inverse control methodology. Federal Reserve policy is characterized by a feedback equation for either changes in the interest rate or money stock. Optimal policy is characterized by solution of the Ricatti equation. Parameters are estimated that characterize the relative importance to the Fed of stabilizing output, inflation, interest rates, and money growth. The period of study is 1947 through 1992. Evidence is uncovered that policy is optimal within distinct regimes.

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    Bibliographic Info

    Article provided by American Statistical Association in its journal Journal of Business and Economic Statistics.

    Volume (Year): 13 (1995)
    Issue (Month): 4 (October)
    Pages: 419-33

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    Handle: RePEc:bes:jnlbes:v:13:y:1995:i:4:p:419-33

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    Web page: http://www.amstat.org/publications/jbes/index.cfm?fuseaction=main

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    Cited by:
    1. William T. Gavin & Finn E. Kydland, 1996. "Endogenous money supply and the business cycle," Working Paper 9605, Federal Reserve Bank of Cleveland.
    2. William T. Gavin & Finn E. Kydland, 2000. "The nominal facts and the October 1979 policy change," Working Papers 2000-013, Federal Reserve Bank of St. Louis.
    3. Efrem Castelnuovo, 2003. "Squeezing the Interest Rate Smoothing Weight with a Hybrid Expectations Model," Working Papers 2003.6, Fondazione Eni Enrico Mattei.
    4. Richard Dennis, 2001. "The policy preferences of the U.S. Federal Reserve," Working Paper Series 2001-08, Federal Reserve Bank of San Francisco.
    5. Grégory Levieuge & Yannick Lucotte, 2012. "A simple Empirical Measure of Central Bank's Conservatism," Working Papers halshs-00827680, HAL.
    6. Richard Dennis, 2004. "Specifying and estimating New Keynesian models with instrument rules and optimal monetary policies," Working Paper Series 2004-17, Federal Reserve Bank of San Francisco.

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