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Macroeconomic Stability and the Preferences of the Fed: A Formal Analysis, 1961-98

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Author Info
 Favero, Carlo A
Rovelli, Riccardo

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Abstract

The rate of inflation in the U.S. has declined from an average of 4.5% in the period 1960-79 to an average of 3.6% in 1980-98. Between those two periods, the standard deviations of inflation and the output gap have also declined. These facts can be attributed to the interaction of three possible factors: a shift in central bank preferences, a reduction in the variability of aggregate supply shocks, and a more efficient conduct of monetary policy. In this paper we identify the relative roles of these factors. Our framework is based on the estimation of a small structural macro model for the U.S. economy jointly with the first order conditions, which solve the intertemporal optimization problem faced by the Fed. Overall, our results indicate that the policy preferences of the Fed, and in particular the (implicit) inflation target, have changed drastically with the advent of the Volcker-Greenspan era. In addition, we find that the variance of supply shocks has been lower and monetary policy has been conducted more efficiently during this period.

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Publisher Info
Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 35 (2003)
Issue (Month): 4 (August)
Pages: 545-56
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Handle: RePEc:mcb:jmoncb:v:35:y:2003:i:4:p:545-56

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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  1. Efrem Castelnuovo, 2004. "Describing the Fed's conduct with simple Taylor rules: is interest rate smoothing important?," Money Macro and Finance (MMF) Research Group Conference 2003 12, Money Macro and Finance Research Group. [Downloadable!]
  2. Efrem Castelnuovo, 2003. "Describing the Fed's conduct with Taylor rules: is interest rate smoothing important?," Working Paper Series 232, European Central Bank. [Downloadable!]
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  3. Richard Dennis, 2008. "The Frequency Of Price Adjustment And New Keynesian Business Cycle Dynamics," CAMA Working Papers 2008-19, Australian National University, Centre for Applied Macroeconomic Analysis. [Downloadable!]
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  4. Bernd Hayo & Boris Hofmann, 2005. "Comparing Monetary Policy Reaction Functions: ECB versus Bundesbank," Marburg Working Papers on Economics 200502, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung). [Downloadable!]
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  5. Andrew Ang & Sen Dong & Monika Piazzesi, 2007. "No-Arbitrage Taylor Rules," NBER Working Papers 13448, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  6. Stéphane Adjemian & Matthieu Darracq Pariès & Stéphane Moyen, 2008. "Towards a monetary policy evaluation framework," Working Paper Series 942, European Central Bank. [Downloadable!]
  7. Tokhir Mirzoev, 2004. "Limited Commitment, Inaction and Optimal Monetary Policy," Macroeconomics 0409027, EconWPA. [Downloadable!]
  8. Kenneth N. Kuttner & Adam S. Posen, 2007. "Do Markets Care Who Chairs the Central Bank?," Peterson Institute Working Paper Series WP07-3, Peterson Institute for International Economics. [Downloadable!]
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  9. Bessler, David & Leatham, David J. & Yang, Juan, 2005. "In Search of the "Bank Lending Channel": Causality Analysis for the Transmission Mechanism of U.S. Monetary Policy," 2005 Annual meeting, July 24-27, Providence, RI 19558, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association). [Downloadable!]
  10. Fève, Patrick & Matheron, Julien & Sahuc, Jean-Guillaume, 2007. "Optimal Monetary Policy and Technological Shocks in the Post-War US Business Cycle," IDEI Working Papers 484, Institut d'Économie Industrielle (IDEI), Toulouse. [Downloadable!]
  11. A. Hakan Kara, 2007. "Monetary Policy under Imperfect Commitment: Reconciling Theory with Evidence," International Journal of Central Banking, International Journal of Central Banking, vol. 3(1), pages 149-178, March. [Downloadable!]
  12. repec:bep:maccon:v:7:y:2007:i:1:p:1560-1560 is not listed on IDEAS
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