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Policy Regime Changes, Judgment and Taylor rules in the Greenspan Era

  • CINZIA ALCIDI
  • ALESSANDRO FLAMINI
  • ANDREA FRACASSO

This paper investigates policy deviations from linear Taylor rules motivated by the risk management approach followed by the Fed during the Greenspan era. We estimate a nonlinear monetary policy rule via a logistic smoothing transition regression model where policy-makers' judgment, proxied by economically meaningful variables, drives the transition across policy regimes. We find that ignoring judgment‐induced nonlinearities while estimating Taylor rules has remarkable costs in terms of fit: above 250 bps in 10 quarters. Although linear Taylor rules describe well the broad contours of monetary policy, they fail to detect relevant policy decisions driven by policy‐makers' judgment.

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File URL: http://hdl.handle.net/10.1111/j.1468-0335.2009.00777.x
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Article provided by London School of Economics and Political Science in its journal Economica.

Volume (Year): 78 (2011)
Issue (Month): 309 (January)
Pages: 89-107

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Handle: RePEc:bla:econom:v:78:y:2011:i:309:p:89-107
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