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Econometric Policy Evaluation and Inverse Control

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  • Salemi, Michael K.
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    Abstract

    The traditional approach to monetary policy evaluation entails a first step in which structural parameters are estimated and a second in which the performance of alternative policy rules is studied. This paper combines the two steps of the traditional approach into one by estimating a structural model subject to the restriction that the central bank chooses the policy rule that minimizes expected loss. The structure is a forward-looking New Keynesian model in which equilibrium values of output and inflation depend on expectations of future values of those variables. Analysis of U.S. data between 1965 and 2001 support the hypotheses that the sample contains two policy regimes, that the Fed placed far greater weight on stabilizing inflation after 1980, and that improvements in policy were available in both regimes. The unified approach also sharpens estimates of structural parameters.

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    File URL: http://dx.doi.org/10.1353/mcb.2006.0092
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    Bibliographic Info

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

    Volume (Year): 38 (2006)
    Issue (Month): 7 (October)
    Pages: 1737-1764

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    Handle: RePEc:mcb:jmoncb:v:38:y:2006:i:7:p:1737-1764

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

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    Cited by:
    1. Pelin Ilbas & Øistein Røisland & Tommy Sveen, 2013. "The Influence of the Taylor rule on US monetary policy," Working Paper Research 241, National Bank of Belgium.
    2. Gbaguidi S. DAVID, 2011. "Expectations Impact On The Effectiveness Of The Inflation-Real Activity Trade-Off," Theoretical and Practical Research in Economic Fields, ASERS Publishing, vol. 0(2), pages 141-182, December.
    3. Givens, Gregory & Salemi, Michael, 2012. "Inferring monetary policy objectives with a partially observed state," MPRA Paper 39353, University Library of Munich, Germany.
    4. Gregory E. Givens, 2012. "Estimating Central Bank Preferences under Commitment and Discretion," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(6), pages 1033-1061, 09.
    5. Franke, Reiner, 2013. "Competitive Moment Matching of a New-Keynesian and an Old-Keynesian Model," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79988, Verein für Socialpolitik / German Economic Association.
    6. Givens, Gregory E. & Salemi, Michael K., 2008. "Generalized method of moments and inverse control," Journal of Economic Dynamics and Control, Elsevier, vol. 32(10), pages 3113-3147, October.
    7. Gbaguidi, David Sedo, 2011. "Regime Switching in a New Keynesian Phillips Curve with Non-zero Steady-state Inflation Rate," MPRA Paper 35481, University Library of Munich, Germany.
    8. Franke, Reiner & Jang, Tae-Seok & Sacht, Stephen, 2012. "Moment matching versus Bayesian estimation: Backward-looking behaviour in a New-Keynesian baseline model," Economics Working Papers 2012-08, Christian-Albrechts-University of Kiel, Department of Economics.
    9. Franke, Reiner & Jang, Tae-Seok & Sacht, Stephen, 2011. "Moment matching versus Bayesian estimation: Backward-looking behaviour in the new-Keynesian three-equations model," Economics Working Papers 2011,10, Christian-Albrechts-University of Kiel, Department of Economics.
    10. Ray Fair, 2006. "A Comparison of Five Federal Reserve Chairmen: Was Greenspan the Best?," Yale School of Management Working Papers amz2590, Yale School of Management, revised 01 Aug 2007.
    11. Adjemian, Stéphane & Darracq Pariès, Matthieu & Moyen, Stéphane, 2008. "Towards a monetary policy evaluation framework," Working Paper Series 0942, European Central Bank.
    12. Frank Schorfheide, 2008. "DSGE model-based estimation of the New Keynesian Phillips curve," Economic Quarterly, Federal Reserve Bank of Richmond, issue Fall, pages 397-433.

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