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Modest policy interventions

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Author Info
Eric M. Leeper
Tao Zha

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Abstract

This paper brings together identification and forecasting in a positive econometric analysis of policy. We contend that a broad range of important policy questions is consistent with the existing policy process and is not subject to Lucas's critique. We analyze the economics of "business as usual" and show that modest policy interventions, whose effects can be projected even if expectations are modeled as depending solely on past policy, can address routine questions like those raised at regular policy meetings. And modest interventions matter: they can 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 99-22.

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Date of creation: 1999
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Handle: RePEc:fip:fedawp:99-22

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Keywords: Monetary policy Forecasting Vector autoregression Econometrics

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  2. Robert E. Lucas, Jr. & Thomas J. Sargent, 1979. "After Keynesian macroeconomics," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr. [Downloadable!]
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  17. Christopher A. Sims & Tao Zha, 1999. "Error Bands for Impulse Responses," Econometrica, Econometric Society, vol. 67(5), pages 1113-1156, September.
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  18. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1998. "Monetary Policy Shocks: What Have We Learned and to What End?," NBER Working Papers 6400, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  19. James J. Heckman, 2000. "Causal Parameters And Policy Analysis In Economics: A Twentieth Century Retrospective," The Quarterly Journal of Economics, MIT Press, vol. 115(1), pages 45-97, February. [Downloadable!] (restricted)
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  20. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39, pages 195-214, December. [Downloadable!] (restricted)
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  28. Ireland, Peter N., 1997. "A small, structural, quarterly model for monetary policy evaluation," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 47, pages 83-108, December. [Downloadable!] (restricted)
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  30. Stephen G. Cecchetti, 1996. "Inflation Indicators and Inflation Policy," NBER Working Papers 5161, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  31. Cochrane, John H., 1998. "What do the VARs mean? Measuring the output effects of monetary policy," Journal of Monetary Economics, Elsevier, vol. 41(2), pages 277-300, April. [Downloadable!] (restricted)
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  32. Gordon, David B & Leeper, Eric M, 1994. "The Dynamic Impacts of Monetary Policy: An Exercise in Tentative Identification," Journal of Political Economy, University of Chicago Press, vol. 102(6), pages 1228-47, December. [Downloadable!] (restricted)
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  33. John C. Robertson & Ellis W. Tallman, 1999. "Vector autoregressions: forecasting and reality," Economic Review, Federal Reserve Bank of Atlanta, issue Q1, pages 4-18. [Downloadable!]
  34. Sims, Christopher A & Zha, Tao, 1998. "Bayesian Methods for Dynamic Multivariate Models," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 949-68, November.
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  35. Altig, David E & Carlstrom, Charles T & Lansing, Kevin J, 1995. "Computable General Equilibrium Models and Monetary Policy Advice," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 1472-93, November. [Downloadable!] (restricted)
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  36. Zha, Tao, 1999. "Block recursion and structural vector autoregressions," Journal of Econometrics, Elsevier, vol. 90(2), pages 291-316, June. [Downloadable!] (restricted)
  37. Christopher A. Sims & Tao A. Zha, 1998. "Does monetary policy generate recessions?," Working Paper 98-12, Federal Reserve Bank of Atlanta. [Downloadable!]
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  38. John B. Taylor, 1998. "An Historical Analysis of Monetary Policy Rules," NBER Working Papers 6768, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  39. Eric M. Leeper & Christopher A. Sims & Tao Zha, 1996. "What Does Monetary Policy Do?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(1996-2), pages 1-78. [Downloadable!]
  40. Miller, Preston J & Roberds, William T, 1991. "The Quantitative Significance of the Lucas Critique," Journal of Business & Economic Statistics, American Statistical Association, vol. 9(4), pages 361-87, October.
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  41. Andrews, Donald W K, 1993. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Econometrica, Econometric Society, vol. 61(4), pages 821-56, July. [Downloadable!] (restricted)
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