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Monetary policy rules and inflation control in the US

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  • Eleftheriou, Maria
  • Kouretas, Georgios P.

Abstract

The interplay between policy-setting by the Federal Reserve and inflation is explored during a period with significant and diverse episodes from 1979 onwards. Our unrestricted estimates reveal a stable target path for the policy rate with a strong response to inflation and an effective control over it. We identify moments of discretionary and rule-based policy-making throughout three different chairmanships and quantify the degree of policy inertia. Including the ‘great recession’ and the first years after the crisis leaves the above-mentioned characteristics unchanged and shows that the adjustment to deviations from the target path becomes less gradual. Replacing the federal funds rate with a shadow rate yields ineffective inflation control, indicating that the dynamic behaviour of inflation is affected by the implementation of unconventional policy when the zero lower bound applies.

Suggested Citation

  • Eleftheriou, Maria & Kouretas, Georgios P., 2023. "Monetary policy rules and inflation control in the US," Economic Modelling, Elsevier, vol. 119(C).
    • Handle: RePEc:eee:ecmode:v:119:y:2023:i:c:s0264999322003741
    DOI: 10.1016/j.econmod.2022.106137
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    Keywords

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    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • 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

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