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The policy preferences of the U.S. Federal Reserve

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Richard Dennis

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Abstract

This paper uses a small data-consistent model of the United States to identify and estimate the Federal Reserve's policy preferences. We find critical differences between the policy regimes in operation during the Burns-Miller and Volcker-Greenspan periods. Over the Volcker-Greenspan period we estimate the inflation target to be 2.0% and find that policymakers were willing to allow the real interest rate to change in order to keep overall changes in the nominal interest rate relatively small. In contrast, for the Burns-Miller period the inflation target is estimated to be 5.9%, and we find that policy makers were much more prepared to tolerate changes in the nominal interest rate than they were changes in the real interest rate. Consequently, over this period policymakers tended to accommodate movements in inflation. We find statistical evidence that a policy regime shift occurred with Volcker's appointment to Federal Reserve chairman.

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Paper provided by Federal Reserve Bank of San Francisco in its series Working Papers in Applied Economic Theory with number 2001-08.

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Date of creation: 2001
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Handle: RePEc:fip:fedfap:2001-08

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Keywords: Monetary policy ; Federal Reserve System;

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  21. Efrem Castelnuovo & Paolo Surico, 2004. "Model Uncertainty, Optimal Monetary Policy and the Preferences of the Fed," Scottish Journal of Political Economy, Scottish Economic Society, vol. 51(1), pages 105-126, 02. [Downloadable!] (restricted)
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