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Measuring systematic monetary policy

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  • Kevin D. Hoover
  • Òscar Jordà

Abstract

The 1970s and early 1980s witnessed two main approaches to the analysis of monetary policy. The first is the early new classical approach of Lucas, based on the assumptions of rational expectations and market clearing. The second is the a theoretical econometrics of Simsâ??s VAR program. Both have developed: the new classical approach has been enriched through various accounts of price stickiness, cost of adjustment or alternative expectational schemes; the original VAR program has developed into the structural VAR program. This paper clarifies the relationship between these two programs. Based on work of Cochrane (1998), it shows that the typical method of evaluating unanticipated, unsystematic monetary policy is correct only if the conditions necessary for Lucasâ??s policy-ineffectiveness proposition hold, while recent methods for evaluating systematic monetary policy violate Lucasâ??s policy-noninvariance proposition (â??the Lucas critiqueâ??). The paper shows how to construct and estimate (using regime changes) a model in which some agents form rational-expectations and others follow rules of thumb. In such a model, monetary policy actions can be validly decomposed into systematic and unsystematic components and valid counterfactual experiments on alternative systematic monetary-policy rules can be evaluated.

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Bibliographic Info

Article provided by Federal Reserve Bank of St. Louis in its journal Review.

Volume (Year): (2001)
Issue (Month): Jul ()
Pages: 113-144

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Handle: RePEc:fip:fedlrv:y:2001:i:jul:p:113-144:n:v.83no.4

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Keywords: Monetary policy;

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Citations

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Cited by:
  1. Fabio Milani & John Treadwell, 2012. "The Effects of Monetary Policy “News” and “Surprises”," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(8), pages 1667-1692, December.
  2. Korinek, Anton & Siklos, Pierre L. & Hochreiter, Eduard, 2002. "The Potential Consequences of Alternative Exchange Rate Regimes: A Study of Three Candidate Regions," Working Papers 76, Oesterreichische Nationalbank (Austrian Central Bank).
  3. Bachmeier, Lance, 2008. "Monetary policy and the transmission of oil shocks," Journal of Macroeconomics, Elsevier, vol. 30(4), pages 1738-1755, December.
  4. Oscar Jorda & Kevin Salyer, . "The Response of Term Rates to Monetary Policy Uncertainty," Department of Economics 01-06, California Davis - Department of Economics.
  5. Kenneth N. Kuttner & Patricia C. Mosser, 2002. "The monetary transmission mechanism: some answers and further questions," Economic Policy Review, Federal Reserve Bank of New York, issue May, pages 15-26.
  6. Rautureau, Nicolas, 2004. "Measuring the long-term perception of monetary policy and the term structure," Research Discussion Papers 12/2004, Bank of Finland.
  7. Michael S. Hanson, 2006. "Varying Monetary Policy Regimes: A Vector Autoregressive Investigation," Wesleyan Economics Working Papers 2006-003, Wesleyan University, Department of Economics.
  8. Sydney Ludvigson & Charles Steindel & Martin Lettau, 2002. "Monetary policy transmission through the consumption-wealth channel," Economic Policy Review, Federal Reserve Bank of New York, issue May, pages 117-133.

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