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The changing role of expectations in US monetary policy: A new look using the Livingston Survey

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  • Banerjee, A.
  • Malik, S.

Abstract

Using a Bayesian structural vector autoregression (TVP-SVAR) with time-varying parameters and volatility we investigate monetary policy in the United States, in particular its interaction with the formation of inflation expectations and the linkages between monetary policy, inflation expectations and the behaviour of CPI inflation. We use Livingston Survey data for expected inflation, measured at a bi-annual frequency, actual inflation, unemployment and a nominal interest rate to estimate the VAR and show the significant changes that have occurred in the responses of these variables to monetary policy shocks or to shocks to expected and actual inflation. In so doing, we generalize the analysis undertaken by Leduc, Sill and Stark (2007) to allow for a more nuanced and detailed look at questions such as the impact of different chairmanship regimes at the Federal Reserve Board, the role of good policy versus good luck, and second round inflation effects. While some of the questions asked have a relatively long history, the methods used to undertake our investigations are very new, and the time-varying structure allows us to offer a more detailed picture. In using these methods we also undertake a substantial technical discussion to unearth the appropriateness of the TVP-SVAR models hitherto estimated in the literature, in particular the role of the choice of priors in determining the outcome of the estimations. As we discuss in the paper, this is an important issue which has remained rather hidden in the discussions surrounding the estimation of TVP-SVARs, yet may have a substantially important role to play in determining the results obtained.

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Bibliographic Info

Paper provided by Banque de France in its series Working papers with number 376.

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Length: 35 pages
Date of creation: 2012
Date of revision:
Handle: RePEc:bfr:banfra:376

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Keywords: monetary policy; expectations; inflation; time variation; VARs; impulse responses.;

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  1. Jacquier, Eric & Polson, Nicholas G & Rossi, Peter E, 1994. "Bayesian Analysis of Stochastic Volatility Models: Comments: Reply," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(4), pages 413-17, October.
  2. Kirchner, Markus & Cimadomo, Jacopo & Hauptmeier, Sebastian, 2010. "Transmission of government spending shocks in the euro area: Time variation and driving forces," Working Paper Series 1219, European Central Bank.
  3. Timothy Cogley & Thomas J. Sargent, 2003. "Drifts and volatilities: monetary policies and outcomes in the post WWII U.S," Working Paper 2003-25, Federal Reserve Bank of Atlanta.
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  5. Christina D. Romer & David H. Romer, 2004. "Choosing the Federal Reserve Chair: Lessons from History," Journal of Economic Perspectives, American Economic Association, vol. 18(1), pages 129-162, Winter.
  6. Jouchi Nakajima, 2011. "Time-Varying Parameter VAR Model with Stochastic Volatility: An Overview of Methodology and Empirical Applications," IMES Discussion Paper Series 11-E-09, Institute for Monetary and Economic Studies, Bank of Japan.
  7. N. Gregory Mankiw, 2001. "U.S. Monetary Policy During the 1990s," NBER Working Papers 8471, National Bureau of Economic Research, Inc.
  8. Benati, Luca & Mumtaz, Haroon, 2007. "U.S. evolving macroeconomic dynamics: a structural investigation," Working Paper Series 0746, European Central Bank.
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  10. Jacquier, Eric & Polson, Nicholas G & Rossi, Peter E, 1994. "Bayesian Analysis of Stochastic Volatility Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(4), pages 371-89, October.
  11. Benjamin M. Friedman, 2006. "The Greenspan Era: Discretion, Rather than Rules," American Economic Review, American Economic Association, vol. 96(2), pages 174-177, May.
  12. Leduc, Sylvain & Sill, Keith & Stark, Tom, 2007. "Self-fulfilling expectations and the inflation of the 1970s: Evidence from the Livingston Survey," Journal of Monetary Economics, Elsevier, vol. 54(2), pages 433-459, March.
  13. Benjamin M. Friedman, 2006. "The Greenspan Era: Discretion, Rather Than Rules," NBER Working Papers 12118, National Bureau of Economic Research, Inc.
  14. Jouchi Nakajima & Munehisa Kasuya & Toshiaki Watanabe, 2009. "Bayesian Analysis of Time-Varying Parameter Vector Autoregressive Model for the Japanese Economy and Monetary Policy," Global COE Hi-Stat Discussion Paper Series gd09-072, Institute of Economic Research, Hitotsubashi University.
  15. Ireland, Peter N, 1996. "The Role of Countercyclical Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 104(4), pages 704-23, August.
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