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Modest Policy Interventions

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Author Info
Eric M. Leeper
Tao Zha

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Abstract

We present a framework for computing and evaluating linear projections of macro variables conditional on hypothetical paths of monetary policy. A modest policy intervention is a change in policy that does not significantly shift agents' beliefs about policy regime and does not generate quantitatively important expectations-formation effects of the kind Lucas (1976) emphasizes. The framework is applied to an econometric model of U.S. postwar monetary policy behavior. It finds that a rich class of interventions routinely considered by the Federal Reserve are modest and their impacts can be reliably forecasted by an accurately identified linear model. Moreover, modest interventions can matter: they may shift the projected paths and probability distributions of macro variables in economically meaningful ways.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9192.

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Date of creation: Sep 2002
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Handle: RePEc:nbr:nberwo:9192

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Find related papers by JEL classification:
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation

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