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How Credible Is the Federal Reserve? A Structural Estimation of Policy Re-optimizations

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  • Davide Debortoli
  • Aeimit Lakdawala

Abstract

The paper proposes a new measure of the degree of credibility of the Federal Reserve. We estimate a medium-scale macroeconomic model, where the central bank has access to a commitment technology, but where a regime-switching process governs occasional re-optimizations of announced plans. The framework nests the commonly used discretion and commitment cases, while allowing for a continuum of intermediate cases. Our estimates reject both full-commitment and discretion. We instead identify occasional re-optimization episodes both before and during the Great Moderation period. Finally, through counterfactual analyses we assess the role of credibility over the past four decades.

Suggested Citation

  • Davide Debortoli & Aeimit Lakdawala, 2016. "How Credible Is the Federal Reserve? A Structural Estimation of Policy Re-optimizations," American Economic Journal: Macroeconomics, American Economic Association, vol. 8(3), pages 42-76, July.
  • Handle: RePEc:aea:aejmac:v:8:y:2016:i:3:p:42-76
    Note: DOI: 10.1257/mac.20150029
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    1. repec:eee:eecrev:v:100:y:2017:i:c:p:364-389 is not listed on IDEAS
    2. Campbell, Jeffrey R. & Weber, Jacob P., 2018. "Open Mouth Operations," Working Paper Series WP-2018-3, Federal Reserve Bank of Chicago.
    3. Luca Gambetti & Dimitris Korobilis & John D. Tsoukalas & Francesco Zanetti, 2017. "The Effect of News Shocks and Monetary Policy," BCAM Working Papers 1705, Birkbeck Centre for Applied Macroeconomics.
    4. Gersbach, Hans & Liu, Yulin & Tischhauser, Martin, 2018. "Versatile Forward Guidance: Escaping or Switching?," CEPR Discussion Papers 12559, C.E.P.R. Discussion Papers.
    5. Chatelain, Jean-Bernard & Ralf, Kirsten, 2017. "Can we Identify the Fed's Preferences?," EconStor Preprints 149993, ZBW - German National Library of Economics.
    6. Chen, Xiaoshan & Kirsanova, Tatiana & Leith, Campbell, 2017. "How optimal is US monetary policy?," Journal of Monetary Economics, Elsevier, vol. 92(C), pages 96-111.
    7. Haberis, Alex & Harrison, Richard & Waldron, Matthew, 2017. "Uncertain forward guidance," Bank of England working papers 654, Bank of England.
    8. Ippei Fujiwara & Timothy Kam & Takeki Sunakawa, 2016. "A note on imperfect credibility," CAMA Working Papers 2016-37, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    9. Ricardo Nunes & Jinill Kim & Jesper Linde & Davide Debortoli, 2014. "Designing a Simple Loss Function for the Fed: Does the Dual Mandate Make Sense?," 2014 Meeting Papers 1043, Society for Economic Dynamics.
    10. repec:wly:jmoncb:v:49:y:2017:i:2-3:p:393-415 is not listed on IDEAS
    11. Tatiana Kirsanova & Celsa Machado & Ana Paula Ribeiro, 2017. "Should the ECB coordinate EMU fiscal policies?," Working Papers 2018-02, Business School - Economics, University of Glasgow.
    12. Ragna Alstadheim & Øistein Røisland, 2017. "When Preferences for a Stable Interest Rate Become Self‐Defeating," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 49(2-3), pages 393-415, March.
    13. Davide Debortoli & Jinill Kim & Jesper Lindé & Ricardo Nunes, 2017. "Designing a simple loss function for central banks: Does a dual mandate make sense?," Economics Working Papers 1560, Department of Economics and Business, Universitat Pompeu Fabra.

    More about this item

    JEL classification:

    • D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy Formulation and Implementation
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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