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Modeling Volcker as a non-absorbing state: agnostic identification of a Markov-switching VAR

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  • Michael T. Owyang

Abstract

Recently, models of monetary policy have been constructed to include structural breaks to account for changes in policymaker preferences or operating procedures. These models typically assume that when changes occur, they happen once and for all. In this paper, we allow the policymaker and the economy to switch freely between regimes. We find that not only does the nature and effect of innovations to monetary policy change, but switching the policy rule and the economy's subsequent response can in and of itself alter the path of the economy. We find the switch itself can generate disinflationary dynamics.

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Bibliographic Info

Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2002-018.

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Date of creation: 2002
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Handle: RePEc:fip:fedlwp:2002-018

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Keywords: Monetary policy ; Vector autoregression;

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References

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  1. Clarida, R. & Gali, J. & Gertler, M., 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and some Theory," Working Papers 98-01, C.V. Starr Center for Applied Economics, New York University.
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  8. John Geweke, 1991. "Evaluating the accuracy of sampling-based approaches to the calculation of posterior moments," Staff Report 148, Federal Reserve Bank of Minneapolis.
  9. Michael S. Hanson, 2006. "Varying Monetary Policy Regimes: A Vector Autoregressive Investigation," Wesleyan Economics Working Papers 2006-003, Wesleyan University, Department of Economics.
  10. Thornton, Daniel L., 2001. "The Federal Reserve's operating procedure, nonborrowed reserves, borrowed reserves and the liquidity effect," Journal of Banking & Finance, Elsevier, vol. 25(9), pages 1717-1739, September.
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  12. Uhlig, H.F.H.V.S., 2001. "Did the FED Surprise the Markets in 2001? A Case Study for Vars with Sign Restrictions," Discussion Paper 2001-88, Tilburg University, Center for Economic Research.
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  14. repec:fip:fedfap:2001-08 is not listed on IDEAS
  15. Michael T. Owyang, 2001. "Persistence, excess volatility, and volatility clusters in inflation," Review, Federal Reserve Bank of St. Louis, issue Nov., pages 41-52.
  16. Hoover, Kevin D. & Perez, Stephen J., 1994. "Post hoc ergo propter once more an evaluation of 'does monetary policy matter?' in the spirit of James Tobin," Journal of Monetary Economics, Elsevier, vol. 34(1), pages 47-74, August.
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  18. Jean Boivin & Marc Giannoni, 2002. "Assessing changes in the monetary transmission mechanism: a VAR approach," Economic Policy Review, Federal Reserve Bank of New York, issue May, pages 97-111.
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  25. Jon Faust, 1998. "The robustness of identified VAR conclusions about money," International Finance Discussion Papers 610, Board of Governors of the Federal Reserve System (U.S.).
  26. 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(2), pages 1-78.
  27. Chang-Jin Kim & Charles R. Nelson, 1998. "Business Cycle Turning Points, A New Coincident Index, And Tests Of Duration Dependence Based On A Dynamic Factor Model With Regime Switching," The Review of Economics and Statistics, MIT Press, vol. 80(2), pages 188-201, May.
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Citations

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Cited by:
  1. Neville Francis & Michael T. Owyang, 2004. "Monetary policy in a Markov-switching VECM: implications for the cost of disinflation and the price puzzle," Working Papers 2003-001, Federal Reserve Bank of St. Louis.
  2. Andrea Cipollini & Kostas Mouratidis & Nicola Spagnolo, 2008. "Evaluating currency crises: the case of the European monetary system," Empirical Economics, Springer, vol. 35(1), pages 11-27, August.
  3. Chang-Jin Kim & Jeremy M. Piger & Richard Startz, 2004. "Estimation of Markov regime-switching regression models with endogenous switching," Working Papers 2003-015, Federal Reserve Bank of St. Louis.
  4. Neville Francis & Michael T. Owyang & Athena T. Theodorou, 2003. "The use of long-run restrictions for the identification of technology shocks," Working Papers 2003-010, Federal Reserve Bank of St. Louis.

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