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Macroeconomic switching

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Author Info
Christopher Sims
Tao Zha

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Abstract

We discuss the results of fitting a 6-variable structural VAR in which we allow for certain types of parameter variation over time. Allowing structural equation variances to change over time is extremely important in improving fit. Allowing the coefficients that define the model’s dynamics to change is less important to improving fit, though models with changing parameters are consistent with the data. We pay special attention to a version of the model that allows the monetary policy rule, but not other parts of the model, to show changing coefficients. Results from this model fit some aspects of conventional wisdom about changes in monetary policy over time, but imply that the changes in policy have been more subtle than dramatic. We construct counterfactual histories for the early 1980’s, suppressing the “Volcker regime” in monetary policy. We find a steadier decline in inflation and a smaller recession earlier in the period, but slower growth later, than actually occurred.

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Article provided by Federal Reserve Bank of San Francisco in its journal Proceedings.

Volume (Year): (2002)
Issue (Month): Mar ()
Pages:
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Handle: RePEc:fip:fedfpr:y:2002:i:mar:x:6

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," CEPR Discussion Papers 1908, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  2. Newey, Whitney K & West, Kenneth D, 1987. "A Simple, Positive Semi-definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix," Econometrica, Econometric Society, vol. 55(3), pages 703-08, May. [Downloadable!] (restricted)
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  3. Eric M. Leeper & Tao Zha, 2002. "Empirical Analysis of Policy Interventions," NBER Working Papers 9063, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  4. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-84, March. [Downloadable!] (restricted)
  5. Michael S. Hanson, 2006. "Varying Monetary Policy Regimes: A Vector Autoregressive Investigation," Wesleyan Economics Working Papers 2006-003, Wesleyan University, Department of Economics. [Downloadable!]
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  6. Chib S. & Jeliazkov I., 2001. "Marginal Likelihood From the Metropolis-Hastings Output," Journal of the American Statistical Association, American Statistical Association, vol. 96, pages 270-281, March. [Downloadable!] (restricted)
  7. Rochelle M. Edge, 2000. "Time-to-build, time-to-plan, habit-persistence, and the liquidity effect," International Finance Discussion Papers 673, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  8. Timothy Cogley & Thomas Sargent, . "Evolving Post-World War II U.S. Inflation Dynamics," Working Papers 2132872, Department of Economics, W. P. Carey School of Business, Arizona State University. [Downloadable!]
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  9. Eric M. Leeper & Tao Zha, 2003. "Modest policy interventions," Working Paper 2003-24, Federal Reserve Bank of Atlanta. [Downloadable!]
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  10. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 2001. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," NBER Working Papers 8403, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  11. Sims, Christopher A & Zha, Tao, 1998. "Bayesian Methods for Dynamic Multivariate Models," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 949-68, November.
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