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The Federal Reserve's Dual Mandate: A Time-Varying Monetary Policy Priority Index for the United States

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  • René Lalonde
  • Nicolas Parent
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    Abstract

    In the United States, the Federal Reserve has a dual mandate of promoting stable inflation and maximum employment. Since the Fed directly controls only one instrument-the federal funds rate-the authors argue that the Fed's priorities continuously alternate between inflation and economic activity. In this paper, the authors assume that the effective weights put by the Fed on different indicators vary over time. To test this assumption, they estimate a monetary policy priority index by adding non-linear endogenous weights to a conventional Taylor-type rule.

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    Bibliographic Info

    Paper provided by Bank of Canada in its series Working Papers with number 06-11.

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    Length: 33 pages
    Date of creation: 2006
    Date of revision:
    Handle: RePEc:bca:bocawp:06-11

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    Related research

    Keywords: Monetary policy framework; Monetary policy implementation; Econometric and statistical methods;

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    1. Hamilton, James D., 1999. "A Parametric Approach to Flexible Nonlinear Inference," University of California at San Diego, Economics Working Paper Series qt68s8157x, Department of Economics, UC San Diego.
    2. Orphanides, Athanasios & Wilcox, David W, 2002. "The Opportunistic Approach to Disinflation," International Finance, Wiley Blackwell, vol. 5(1), pages 47-71, Spring.
    3. Goodfriend, Marvin, 1991. "Interest rates and the conduct of monetary policy," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 34(1), pages 7-30, January.
    4. Robert L. Hetzel, 2000. "The Taylor rule : is it a useful guide to understanding monetary policy?," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 1-33.
    5. Andrew Rennison, 2003. "Comparing Alternative Output-Gap Estimators: A Monte Carlo Approach," Working Papers 03-8, Bank of Canada.
    6. Richard Clarida & Jordi Galí & Mark Gertler, 1997. "Monetary policy rules and macroeconomic stability: Evidence and some theory," Economics Working Papers 350, Department of Economics and Business, Universitat Pompeu Fabra, revised May 1999.
    7. Denise R. Osborn & Dong Heon Kim & Marianne Sensier, 2005. "Nonlinearity in the Fed's monetary policy rule," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 20(5), pages 621-639.
    8. Gabriel Srour, 2001. "Why Do Central Banks Smooth Interest Rates?," Working Papers 01-17, Bank of Canada.
    9. Bec Frédérique & Ben Salem Mélika & Collard Fabrice, 2002. "Asymmetries in Monetary Policy Reaction Function: Evidence for U.S. French and German Central Banks," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 6(2), pages 1-22, July.
    10. Olivier Jean Blanchard & Danny Quah, 1988. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," NBER Working Papers 2737, National Bureau of Economic Research, Inc.
    11. I-Lok Chang & P.A.V.B. Swamy & George S. Tavlas, 2003. "How stable are monetary policy rules: Estimating the time-varying coefficients in a monetary policy reaction function for the U.S," Computing in Economics and Finance 2003 89, Society for Computational Economics.
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