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Actual Federal Reserve policy behavior and interest rate rules

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  • Ray C. Fair

Abstract

A popular way to approximate Federal Reserve policy is through the use of estimated interest rate equations, or policy "rules." In these rules, the dependent variable is the interest rate that the Federal Reserve is assumed to control and the explanatory variables are those factors assumed to affect Federal Reserve behavior. This article presents estimates of such a rule, using data from 1954:1-1999:3 but omitting the 1979:4-1982:3 period, when monetary targets were emphasized. Although the estimated coefficient on inflation is found to be larger in the post-1982 period, the difference is not statistically significant, and statistical tests fail to reject the hypothesis that the interest rate rule is stable across these two periods.

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Bibliographic Info

Article provided by Federal Reserve Bank of New York in its journal Economic Policy Review.

Volume (Year): (2001)
Issue (Month): Mar ()
Pages: 61-72

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Handle: RePEc:fip:fednep:y:2001:i:mar:p:61-72:n:v.7no.1

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Keywords: Monetary policy - United States ; Interest rates;

References

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  1. Dean Croushore & Tom Stark, 1994. "Evaluating McCallum's rule for monetary policy," Working Papers 94-26, Federal Reserve Bank of Philadelphia.
  2. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July.
  3. Taylor, John B., 1985. "What would nominal GNP targetting do to the business cycle?," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 22(1), pages 61-84, January.
  4. Ray C. Fair, 1977. "The Sensitivity of Fiscal-Policy Effects to Assumptions about the Behavior of the Federal Reserve," Cowles Foundation Discussion Papers 446, Cowles Foundation for Research in Economics, Yale University.
  5. Martin Feldstein & James H. Stock, 1993. "The Use of Monetary Aggregate to Target Nominal GDP," NBER Working Papers 4304, National Bureau of Economic Research, Inc.
  6. Stephen K. McNees, 1986. "Modeling the Fed: a forward- looking monetary policy reaction function," New England Economic Review, Federal Reserve Bank of Boston, issue Nov, pages 3-8.
  7. Robert E. Hall & N. Gregory Mankiw, 1993. "Nominal Income Targeting," NBER Working Papers 4439, National Bureau of Economic Research, Inc.
  8. Richard Clarida & Jordi Gali & Mark Gertler, 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," NBER Working Papers 6442, National Bureau of Economic Research, Inc.
  9. Todd E. Clark, 1994. "Nominal GDP targeting rules: can they stabilize the economy?," Economic Review, Federal Reserve Bank of Kansas City, issue Q III, pages 11-25.
  10. James W. Christian, 1968. "A Further Analysis Of The Objectives Of American Monetary Policy," Journal of Finance, American Finance Association, vol. 23(3), pages 465-477, 06.
  11. Glenn D. Rudebusch, 1999. "Is the Fed too timid? Monetary policy in an uncertain world," Working Papers in Applied Economic Theory 99-05, Federal Reserve Bank of San Francisco.
  12. Fair, Ray C. & Howrey, E. Philip, 1996. "Evaluating alternative monetary policy rules," Journal of Monetary Economics, Elsevier, vol. 38(2), pages 173-193, October.
  13. Ray C. Fair, 2000. "Estimated, Calibrated, and Optimal Interest Rate Rules," Cowles Foundation Discussion Papers 1258, Cowles Foundation for Research in Economics, Yale University.
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Citations

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Cited by:
  1. Joseph E. Gagnon & Jane Ihrig, 2001. "Monetary policy and exchange rate pass-through," International Finance Discussion Papers 704, Board of Governors of the Federal Reserve System (U.S.).
  2. Athanasios Orphanides, 2001. "Monetary policy rules, macroeconomic stability and inflation: a view from the trenches," Finance and Economics Discussion Series 2001-62, Board of Governors of the Federal Reserve System (U.S.).
  3. Katrin Wesche, 2003. "Monetary Policy in Europe: Evidence from Time-Varying Taylor Rules," Bonn Econ Discussion Papers bgse21_2003, University of Bonn, Germany.
  4. Alan Ahearne & Joseph Gagnon & Jane Haltmaier & Steve Kamin ... [et al.]., 2002. "Preventing deflation: lessons from Japan's experience in the 1990s," International Finance Discussion Papers 729, Board of Governors of the Federal Reserve System (U.S.).
  5. Joseph E. Gagnon & Jane Ihrig, 2004. "Monetary policy and exchange rate pass-through This article is a U.S. Government work and is in the public domain in the U.S.A," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 9(4), pages 315-338.
  6. Travaglini, Guido, 2007. "The U.S. Dynamic Taylor Rule With Multiple Breaks, 1984-2001," MPRA Paper 3419, University Library of Munich, Germany, revised 15 Jun 2007.
  7. Ling Hu & Peter C.B. Phillips, 2002. "Dynamics of the Federal Funds Target Rate: A Nonstationary Discrete Choice Approach," Cowles Foundation Discussion Papers 1365, Cowles Foundation for Research in Economics, Yale University.
  8. Adrienne A. Kearney, 2003. "The Changing Probability of a Monetary Policy Response to Inflation and Employment Announcements," Eastern Economic Journal, Eastern Economic Association, vol. 29(4), pages 565-574, Fall.
  9. Luís, Pacheco, 2004. "Asset Prices and Monetary Policy in the Euro Area: a tentative model," MPRA Paper 6579, University Library of Munich, Germany.
  10. Douglas Curtis, 2005. "Monetary Policy and Economic Activity in Canada in the 1990s," Canadian Public Policy, University of Toronto Press, vol. 31(1), pages 59-78, March.

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