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Monetary Policy in the Greenspan Era: A Time Series Analysis of Rules vs. Discretion

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  • Anders Møller Christensen
  • Heino Bohn Nielsen

Abstract

Relationships between the Federal funds rate, unemployment, inflation and the long‐term bond rate are investigated with cointegration techniques. We find a stable long‐term relationship between the Federal funds rate, unemployment and the bond rate. This relationship is interpretable as a policy target because deviations are corrected via the Federal funds rate. Deviations of the actual Federal funds rate from the estimated target give simple indications of discretionary monetary policy, and the larger deviations relate to special episodes outside the current information set. A more traditional Taylor‐type target, where inflation appears instead of the bond rate, does not seem congruent with the data.

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  • Anders Møller Christensen & Heino Bohn Nielsen, 2009. "Monetary Policy in the Greenspan Era: A Time Series Analysis of Rules vs. Discretion," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 71(1), pages 69-89, February.
    • Handle: RePEc:bla:obuest:v:71:y:2009:i:1:p:69-89
    DOI: 10.1111/j.1468-0084.2008.00517.x
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    2. Macchiarelli, Corrado, 2014. "Bond market co-movements, expected inflation and the GBP-USD equilibrium real exchange rate," The Quarterly Review of Economics and Finance, Elsevier, vol. 54(2), pages 242-256.
    3. Katrin Wölfel & Christoph S. Weber, 2017. "Searching for the Fed’s reaction function," Empirical Economics, Springer, vol. 52(1), pages 191-227, February.
    4. Bec, Frédérique & Gollier, Christian, 2009. "Cyclicality and Term Structure of Value-at-Risk in Europe," TSE Working Papers 09-035, Toulouse School of Economics (TSE).
    5. Luís Francisco Aguiar-Conraria & Manuel M. F. Martins & Maria Joana Soares, 2014. "Analyzing the Taylor Rule with Wavelet Lenses," NIPE Working Papers 18/2014, NIPE - Universidade do Minho.
    6. J. James Reade & Ulrich Volz, 2009. "Too Much to Lose, or More to Gain? Should Sweden Join the Euro?," Economics Series Working Papers 442, University of Oxford, Department of Economics.
    7. Reade, J. James & Volz, Ulrich, 2011. "Leader of the pack? German monetary dominance in Europe prior to EMU," Economic Modelling, Elsevier, vol. 28(1), pages 239-250.
    8. Jensen, Henrik & ,, 2010. "What Drives the European Central Bank's Interest-Rate Changes?," CEPR Discussion Papers 8160, C.E.P.R. Discussion Papers.
    9. Giulia Ghiani & Max Gillman & Michal Kejak, 2016. "Persistent Liquidity," Working Papers 1010, University of Missouri-St. Louis, Department of Economics.
    10. Berenguer Rico, Vanessa & Gonzalo, Jesús, 2013. "Co-summability from linear to non-linear cointegration," UC3M Working papers. Economics we1312, Universidad Carlos III de Madrid. Departamento de Economía.
    11. Eleftheriou, Maria & Kouretas, Georgios P., 2023. "Monetary policy rules and inflation control in the US," Economic Modelling, Elsevier, vol. 119(C).
    12. Choo, Han Gwang & Kurita, Takamitsu, 2011. "An empirical investigation of monetary interaction in the Korean economy," International Review of Economics & Finance, Elsevier, vol. 20(2), pages 267-280, April.

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