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The Fed and the New Economy

  • Laurence Ball
  • Robert R. Tchaidze

This paper seeks to understand the behavior of Greenspan’s Federal Reserve in the late 1990s Some authors suggest that the Fed followed a simple Taylor rule while others argue that it deviated from such a rule because it recognized that the New Economy permitted an easing of policy We find that a Taylor rule based on inflation and unemployment does break down in the late 1990s However the Fed’s behavior appears stable once one accounts for the falling NAIRU of the period A rule based on inflation and the deviation of unemployment from the NAIRU captures the Fed’s behavior through the entire period from 1987 to 2000

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/000282802320189096
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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 92 (2002)
Issue (Month): 2 (May)
Pages: 108-114

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Handle: RePEc:aea:aecrev:v:92:y:2002:i:2:p:108-114
Note: DOI: 10.1257/000282802320189096
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  1. Douglas Staiger & James H. Stock & Mark W. Watson, 1996. "How Precise are Estimates of the Natural Rate of Unemployment?," NBER Working Papers 5477, National Bureau of Economic Research, Inc.
  2. Douglas Staiger & James H. Stock & Mark W. Watson, 1997. "The NAIRU, Unemployment and Monetary Policy," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 33-49, Winter.
  3. Athanasios Orphanides, 1998. "Monetary policy rules based on real-time data," Finance and Economics Discussion Series 1998-03, Board of Governors of the Federal Reserve System (U.S.).
  4. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
  5. Robert R Tchaidze, 2001. "Estimating Taylor Rules in a Real Time Setting," Economics Working Paper Archive 457, The Johns Hopkins University,Department of Economics.
  6. N. Gregory Mankiw, 2001. "U.S. Monetary Policy During the 1990s," NBER Working Papers 8471, National Bureau of Economic Research, Inc.
  7. Robert J. Gordon, 1996. "The Time-Varying NAIRU and its Implications for Economic Policy," NBER Working Papers 5735, National Bureau of Economic Research, Inc.
  8. Laurence Ball & Robert Moffitt, 2001. "Productivity Growth and the Phillips Curve," Economics Working Paper Archive 450, The Johns Hopkins University,Department of Economics.
  9. Robert J. Gordon, 1998. "Foundations of the Goldilocks Economy: Supply Shocks and the Time-Varying NAIRU," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(2), pages 297-346.
  10. John B. Taylor, 1998. "An Historical Analysis of Monetary Policy Rules," NBER Working Papers 6768, National Bureau of Economic Research, Inc.
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