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Revealing the preferences of the US Federal Reserve

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  • Pelin Ilbas

Abstract

We use Bayesian methods to estimate the preferences of the US Federal Reserve by assuming that monetary policy is performed optimally under commitment since the mid-sixties. For this purpose, we distinguish between three subperiods, i.e. the pre-Volcker, the Volcker-Greenspan and the Greenspan period. The US economy is described by the Smets and Wouters (2007) model. We find that there has been a switch in the monetary policy regime since Volcker, with a focus on output growth instead of the output gap level as a target variable. We further show that both interest rate variability and interest rate smoothing are significant target variables, though less important than the in‡ation and output growth targets. We find that the "Great Moderation" of output growth is largely explained by the decrease in the volatility of the structural shocks. The Inflation Stabilization, however, is mainly due to the change in monetary policy that took place at the start of Volcker's mandate. During the Greenspan period, the optimal Taylor rule appears to be equally robust to parameter uncertainty as the unrestricted optimal commitment rule.

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Bibliographic Info

Article provided by John Wiley & Sons, Ltd. in its journal Journal of Applied Econometrics.

Volume (Year): 27 (2012)
Issue (Month): 3 (04)
Pages: 440-473

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Handle: RePEc:wly:japmet:v:27:y:2012:i:3:p:440-473

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Cited by:
  1. Caglayan, Mustafa & Jehan, Zainab & Mouratidis, Kostas, 2012. "Asymmetric monetary policy rules for open economies: Evidence from four countries," MPRA Paper 37401, University Library of Munich, Germany.
  2. Gregory Erin Givens, 2009. "Estimating Central Bank Preferences under Commitment and Discretion," Working Papers 200905, Middle Tennessee State University, Department of Economics and Finance.
  3. Andreza Aparecida Palma & Marcelo Savino Portugal, 2014. "Preferences Of The Central Bank Of Brazil Under The Inflation Targeting Regime: Estimation Using A Dsge Model For A Small Open Economy," Anais do XLI Encontro Nacional de Economia [Proceedings of the 41th Brazilian Economics Meeting] 055, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
  4. Angelini, Paolo & Neri, Stefano & Panetta, Fabio, 2012. "Monetary and macroprudential policies," Working Paper Series 1449, European Central Bank.
  5. Cabrera, Nilda & Bejarano, Edilean & Savino Portugal, Marcelo, 2011. "Preferences of the Central Reserve Bank of Peru and optimal monetary policy rules in the inflation targeting regime," Working Papers 2011-010, Banco Central de Reserva del Perú.
  6. Davide Debortoli & Junior Maih & Ricardo Nunes, 2011. "Loose commitment in medium-scale macroeconomic models: theory and applications," International Finance Discussion Papers 1034, Board of Governors of the Federal Reserve System (U.S.).
  7. Givens, Gregory & Salemi, Michael, 2012. "Inferring monetary policy objectives with a partially observed state," MPRA Paper 39353, University Library of Munich, Germany.

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