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Monetary Policy Rules and the U.S. Business Cycle

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  • Pau Rabanal

Abstract

This paper estimates Taylor-type interest rates for the United States allowing for both time and state dependence. It provides evidence that the coefficients of the Taylor rule change significantly over time, and that the behavior of the Federal Reserve over the cycle can be explained using a two-state switching regime model. During expansions, the Federal Reserve follows a rule that can be characterized as inflation targeting with a high degree of interest rate smoothing. During recessions, the Federal Reserve targets output growth and conducts policy in a more active manner. The implications of conducting this type of policy are analyzed in a small scale new Keynesian model.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 04/164.

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Length: 27
Date of creation: 01 Sep 2004
Date of revision:
Handle: RePEc:imf:imfwpa:04/164

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Keywords: Economic models; inflation; monetary policy; central bank; nominal interest rate; real interest rate; monetary economics; inflation targeting; monetary policy rule; monetary policy rules; inflation rate; inflation target; monetary fund; coefficient on inflation; nominal interest rates; discretionary monetary policy; inflation equation; annual inflation; inflation dynamics; real rate of interest; inflation stabilization; monetary response; stock market crash; price stability; macroeconomic stability; monetary authority; gdp deflator; monetary policy history; high inflation; optimal monetary policy; inflation rates; measure of inflation; low inflation; inflation deviation; monetary responses;

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References

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  1. Richard Clarida & Jordi Gali & Mark Gertler, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," NBER Working Papers 7147, National Bureau of Economic Research, Inc.
  2. Jean Boivin & Marc P. Giannoni, 2006. "Has Monetary Policy Become More Effective?," The Review of Economics and Statistics, MIT Press, vol. 88(3), pages 445-462, August.
  3. DOLADO, J.J. & MARIA-DOLORES, R. & RUGE-MURCIA, Francisco J., 2003. "Nonlinear Monetary Policy Rules: Some New Evidence for the U.S," Cahiers de recherche, Universite de Montreal, Departement de sciences economiques 2003-24, Universite de Montreal, Departement de sciences economiques.
  4. Tamim Bayoumi & Silvia Sgherri, 2004. "Monetary Magic? How the Fed Improved the Flexibility of the U.S. Economy," IMF Working Papers, International Monetary Fund 04/24, International Monetary Fund.
  5. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 39(1), pages 195-214, December.
  6. Jordi Gali & Pau Rabanal, 2004. "Technology Shocks and Aggregate Fluctuations: How Well Does the RBS Model Fit Postwar U.S. Data?," NBER Working Papers 10636, National Bureau of Economic Research, Inc.
  7. Frank Schorfheide, 2005. "Learning and Monetary Policy Shifts," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(2), pages 392-419, April.
  8. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 85(3), pages 473-91, June.
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Citations

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Cited by:
  1. Thanassis Kazanas & Apostolis Philippopoulos & Elias Tzavalis, 2011. "Monetary Policy Rules And Business Cycle Conditions," Manchester School, University of Manchester, University of Manchester, vol. 79(s2), pages 73-97, 09.
  2. Edoardo Gaffeo & Ivan Petrella & Damjan Pfajfar & Emiliano Santoro, 2012. "Loss Aversion and the Asymmetric Transmission of Monetary Policy," Discussion Papers 12-21, University of Copenhagen. Department of Economics.
  3. Mahani Zainal Abidin, 2010. "Fiscal Policy Coordination in Asia: East Asian Infrastructure Investment Fund," Working Papers id:2960, eSocialSciences.
  4. Mahani Zainal Abidin, 2010. "Fiscal Policy Coordination in Asia : East Asian Infrastructure Investment Fund," Macroeconomics Working Papers 21870, East Asian Bureau of Economic Research.
  5. Troy Davig & Eric M. Leeper, 2007. "Generalizing the Taylor Principle," American Economic Review, American Economic Association, American Economic Association, vol. 97(3), pages 607-635, June.
  6. Vicente Tuesta & Pau Rabanal, 2006. "Euro-Dollar Real Exchange Rate Dynamics in an Estimated Two-Country Model," IMF Working Papers, International Monetary Fund 06/177, International Monetary Fund.
  7. Cinzia Alcidi & Alessandro Flamini & Andrea Fracasso, 2011. "Policy Regime Changes, Judgment and Taylor rules in the Greenspan Era," Economica, London School of Economics and Political Science, London School of Economics and Political Science, vol. 78(309), pages 89-107, January.
  8. Wolters, Maik Hendrik, 2010. "Estimating Monetary Policy Reaction Functions Using Quantile Regressions," MPRA Paper 23857, University Library of Munich, Germany.
  9. ZHENG, Tingguo & WANG, Xia & GUO, Huiming, 2012. "Estimating forward-looking rules for China's Monetary Policy: A regime-switching perspective," China Economic Review, Elsevier, Elsevier, vol. 23(1), pages 47-59.
  10. López-Villavicencio, Antonia, 2013. "Interest rates, government purchases and the Taylor rule in recessions and expansions," Journal of Macroeconomics, Elsevier, Elsevier, vol. 38(PB), pages 382-392.
  11. Guillard, Michel & Sosa Navarro, Ramiro, 2009. "Fiscal Imbalances, Inflation and Sovereign Default Dynamics," MPRA Paper 24075, University Library of Munich, Germany.
  12. Rabanal, Pau & Tuesta Reátegui, Vicente, 2006. "Euro-Dollar Real Exchange Rate Dynamics in an Estimated Two-Country Model: What is Important and What is Not," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5957, C.E.P.R. Discussion Papers.

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