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Inferring Policy Objectives from Economic Outcomes

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  • Richard Dennis

Abstract

Estimated policy rules are reduced‐form equations that are silent on many important policy questions. However, a structural understanding of monetary policy can be obtained by estimating a policymaker's objective function. The paper derives conditions under which the parameters in a policymaker's policy objective function can be identified and estimated. We apply these conditions to a New Keynesian sticky‐price model of the US economy. The results show that the implicit inflation target and the relative weight placed on interest rate smoothing both declined when Paul Volcker was appointed Federal Reserve chairman.

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  • Richard Dennis, 2004. "Inferring Policy Objectives from Economic Outcomes," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 66(s1), pages 735-764, September.
    • Handle: RePEc:bla:obuest:v:66:y:2004:i:s1:p:735-764
    DOI: 10.1111/j.1468-0084.2004.100_1.x
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