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Modest policy interventions

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Author Info
Eric M. Leeper
Tao Zha

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Abstract

The authors present a framework for computing and evaluating linear projections of macro variables conditional on hypothetical paths of monetary policy. A modest policy intervention is a change in policy that does not significantly shift agents' beliefs about policy regime and does not generate quantitatively important expectations-formation effects of the kind Lucas (1976) emphasizes. The framework is applied to an econometric model of U.S. postwar monetary policy behavior. It finds that a rich class of interventions routinely considered by the Federal Reserve are modest and their impacts can be reliably forecast by an accurately identified linear model. Moreover, modest interventions can matter: They may shift the projected paths and probability distributions of macro variables in economically meaningful ways.

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Paper provided by Federal Reserve Bank of Atlanta in its series Working Paper with number 2002-19.

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Date of creation: 2002
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Handle: RePEc:fip:fedawp:2002-19

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Keywords: Monetary policy ; Forecasting ; Vector autoregression;

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