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The role of liquid government bonds in the great transformation of American monetary policy

  • Canzoneri, Matthew
  • Cumby, Robert
  • Diba, Behzad
  • López-Salido, David

A fundamental shift in monetary policy occurred around 1980: the Fed went from a "passive" policy to an "active" policy. We study a model in which government bonds provide transactions services. We present two calibrations of our model, using pre- and post-1980 data. We show that estimates of pre- and post-1980 policy rules all lie within our determinacy regions. But, the pre-1980 policy was a very bad monetary policy, even if it avoided sunspot equilibria. Model simulations suggest that household welfare would have increased by 3.3 percent of permanent consumption in this period under an active policy.

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Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 35 (2011)
Issue (Month): 3 (March)
Pages: 282-294

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Handle: RePEc:eee:dyncon:v:35:y:2011:i:3:p:282-294
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