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Real Time Changes in Monetary Policy

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  • Chauvet, Marcelle
  • Tierney, Heather L. R.

Abstract

This paper investigates potential changes in monetary policy over the last decades using a nonparametric vector autoregression model. In the proposed model, the conditional mean and variance are time-dependent and estimated using a nonparametric local linear method, which allows for different forms of nonlinearity, conditional heteroskedasticity, and non-normality. Our results suggest that there have been gradual and abrupt changes in the variances of shocks, in the monetary transmission mechanism, and in the Fed’s reaction function. The response of output was strongest during Volcker’s disinflationary period and has since been slowly decreasing over time. There have been some abrupt changes in the response of inflation, especially in the early 1980s, but we can not conclude that it is weaker now than in previous periods. Finally, we find significant evidence that policy was passive during some parts of Burn’s period, and active during Volcker’s disinflationary period and Greenspan’s period. However, we find that the uncovered behavior of the parameters is more complex than general conclusions suggest, since they display considerable nonlinearities over time. A particular appeal of the recursive estimation of the proposed VAR-ARCH is the detection of discrete local deviations as well as more gradual ones, without smoothing the timing or magnitude of the changes.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 16199.

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Date of creation: Apr 2007
Date of revision: Apr 2009
Handle: RePEc:pra:mprapa:16199

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Related research

Keywords: Monetary Policy; Taylor Rule; Local Estimation; Nonlinearity; Nonparametric; Monetary Policy; Taylor Rule; Local Estimation; Nonlinearity; Nonparametric; Structural Vector Autoregression; Autoregressive Conditional Heteroskedasticity;

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References

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Citations

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Cited by:
  1. Heather L. R. Tierney, 2012. "Examining the ability of core inflation to capture the overall trend of total inflation," Applied Economics, Taylor & Francis Journals, vol. 44(4), pages 493-514, February.
  2. Tierney, Heather L.R., 2009. "A Local Examination for Persistence in Exclusions-from-Core Measures of Inflation Using Real-Time Data," MPRA Paper 13089, University Library of Munich, Germany.
  3. Tierney, Heather L.R., 2011. "Forecasting and tracking real-time data revisions in inflation persistence," MPRA Paper 34439, University Library of Munich, Germany.
  4. Tierney, Heather L.R., 2010. "Real-Time Data Revisions and the PCE Measure of Inflation," MPRA Paper 22387, University Library of Munich, Germany, revised Apr 2010.
  5. Tierney, Heather L.R., 2009. "Evaluating Exclusion-from-Core Measures of Inflation using Real-Time Data," MPRA Paper 17856, University Library of Munich, Germany.

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