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Monetary regime switches and unstable objectives

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  • Davide Debortoli
  • Ricardo Nunes

Abstract

Monetary policy objectives and targets are not necessarily stable over time. The regime switching literature has typically analyzed and interpreted changes in policymakers' behavior through simple interest rate rules. This paper analyzes policy regime switches explicitly modeling policymakers' behavior and objectives. We show how current monetary policy is affected and should optimally respond to alternative regimes. We also show that changes in the parameters of simple rules do not necessarily correspond to changes in policymakers' preferences. In fact, capturing and interpreting regime changes in preferences through interest rate rules can lead to misleading results.

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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 1036.

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Date of creation: 2011
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Handle: RePEc:fip:fedgif:1036

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Citations

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Cited by:
  1. Xiaoshan Chen & Tatiana Kirsanova & Campbell Leith, 2013. "How Optimal is US Monetary Policy?," Working Papers 2013_08, Business School - Economics, University of Glasgow.
  2. Andrew T. Foerster, 2013. "Monetary policy regime switches and macroeconomic dynamic," Research Working Paper RWP 13-04, Federal Reserve Bank of Kansas City.
  3. Moore, Bartholomew, 2014. "Monetary policy regimes and inflation in the new-Keynesian model," Journal of Macroeconomics, Elsevier, vol. 40(C), pages 323-337.

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