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

Listed author(s):
  • Davide Debortoli
  • Aeimit Lakdawala

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.

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File URL: https://www.aeaweb.org/articles?id=10.1257/mac.20150029
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File URL: https://www.aeaweb.org/aej/mac/data/0803/2015-0029_data.zip
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Article provided by American Economic Association in its journal American Economic Journal: Macroeconomics.

Volume (Year): 8 (2016)
Issue (Month): 3 (July)
Pages: 42-76

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Handle: RePEc:aea:aejmac:v:8:y:2016:i:3:p:42-76
Note: DOI: 10.1257/mac.20150029
Contact details of provider: Web page: https://www.aeaweb.org/aej-macro
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