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Monetary policy rules and macroeconomic stability: Evidence and some theory

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  • Richard Clarida
  • Jordi Galí

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  • Mark Gertler

Abstract

We estimate a forward-looking monetary policy reaction function for the postwar United States economy, before and after Volcker's appointment as Fed Chairman in 1979. Our results point to substantial differences in the estimated rule across periods. In particular, interest rate policy in the Volcker-Greenspan period appears to have been much more sensitive to changes in expected inflation than in the pre-Volcker period. We then compare some of the implications of the estimated rules for the equilibrium properties of inflation and output, using a simple macroeconomic model, and show that the Volcker-Greenspan rule is stabilizing.

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Bibliographic Info

Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 350.

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Date of creation: Mar 1997
Date of revision: May 1999
Handle: RePEc:upf:upfgen:350

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Web page: http://www.econ.upf.edu/

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Keywords: Monetary policy rules; business cycles; Taylor rules; sunspot fluctuations;

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  17. Leeper, Eric M., 1991. "Equilibria under 'active' and 'passive' monetary and fiscal policies," Journal of Monetary Economics, Elsevier, vol. 27(1), pages 129-147, February.
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  1. 'A Century of U.S. Central Banking: Goals, Frameworks, Accountability'
    by Mark Thoma in Economist's View on 2013-07-10 13:48:26
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