Inflation measure, Taylor rules, and the Greenspan-Bernanke years
Recent research has emphasized that the Federal Reserve under Chairman Alan Greenspan was forward looking, smoothed interest rates, and focused on core inflation. The semiannual monetary policy reports to U.S. Congress indicate that the measure of inflation used in monetary policy deliberations has also been refined over time: For most of the Greenspan period before 2000, inflation forecasts used the consumer price index (CPI), but in the early 2000s, inflation forecasts switched to using the core personal consumption expenditures (PCE) deflator. Using information contained in Greenbook forecasts, this article estimates two forward-looking Taylor rules that differ only with respect to the measure of inflation used over 1987:1-2006:4. A Taylor rule that is estimated using a time-varying measure of core inflation-CPI until 2000 and PCE thereafter-depicts parameter stability in the Greenspan years, and tracks the actual path of the federal funds rate during the subperiod 2000:1–2006:4, when the measure of inflation used changed. In contrast, a Taylor rule that is estimated using headline CPI inflation does not depict such parameter stability, and indicates the actual funds rate was too low relative to the level prescribed during the subperiod 2000:1-2006:4, as headline CPI inflation remained elevated because of the continual rise in oil prices. Moreover, in real time during most of this subperiod, core PCE inflation was much lower than what is indicated by the current vintage data. These results highlight the importance of using real-time information in evaluating historical monetary policy actions.
Volume (Year): (2010)
Issue (Month): 2Q ()
|Contact details of provider:|| Web page: http://www.richmondfed.org/|
More information through EDIRC
|Order Information:|| Web: http://www.richmondfed.org/publications/ Email: |
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Glenn D. Rudebusch, 2001.
"Term structure evidence on interest rate smoothing and monetary policy inertia,"
Working Paper Series
2001-02, Federal Reserve Bank of San Francisco.
- Rudebusch, Glenn D., 2002. "Term structure evidence on interest rate smoothing and monetary policy inertia," Journal of Monetary Economics, Elsevier, vol. 49(6), pages 1161-1187, September.
- Richard Clarida & Jordi Gali & Mark Gertler, 1998.
"Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory,"
NBER Working Papers
6442, National Bureau of Economic Research, Inc.
- Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," The Quarterly Journal of Economics, Oxford University Press, vol. 115(1), pages 147-180.
- Clarida, R. & Gali, J. & Gertler, M., 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and some Theory," Working Papers 98-01, C.V. Starr Center for Applied Economics, New York University.
- Richard Clarida & Jordi Galí & Mark Gertler, 1997. "Monetary policy rules and macroeconomic stability: Evidence and some theory," Economics Working Papers 350, Department of Economics and Business, Universitat Pompeu Fabra, revised May 1999.
- Clarida, Richard & Galí, Jordi & Gertler, Mark, 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," CEPR Discussion Papers 1908, C.E.P.R. Discussion Papers.
- Glenn D. Rudebusch, 2005.
"Monetary policy inertia: fact or fiction?,"
Working Paper Series
2005-19, Federal Reserve Bank of San Francisco.
- Athanasios Orphanides, 1998.
"Monetary policy rules based on real-time data,"
Finance and Economics Discussion Series
1998-03, Board of Governors of the Federal Reserve System (U.S.).
- Bernanke, Ben S. & Boivin, Jean, 2003.
"Monetary policy in a data-rich environment,"
Journal of Monetary Economics,
Elsevier, vol. 50(3), pages 525-546, April.
- Josephine M. Smith & John B. Taylor, 2007. "The Long and the Short End of the Term Structure of Policy Rules," NBER Working Papers 13635, National Bureau of Economic Research, Inc.
- Jane K. Dokko & Brian M. Doyle & Michael T. Kiley & Jinill Kim & Shane M. Sherlund & Jae W. Sim & Skander J. van den Heuvel, 2009. "Monetary policy and the housing bubble," Finance and Economics Discussion Series 2009-49, Board of Governors of the Federal Reserve System (U.S.).
- Granger, C. W. J. & Newbold, P., 1974. "Spurious regressions in econometrics," Journal of Econometrics, Elsevier, vol. 2(2), pages 111-120, July.
- Michael T. Kiley, 2008. "Estimating the common trend rate of inflation for consumer prices and consumer prices excluding food and energy prices," Finance and Economics Discussion Series 2008-38, Board of Governors of the Federal Reserve System (U.S.).
- Mehra, Yash P., 2001. "The bond rate and estimated monetary policy rules," Journal of Economics and Business, Elsevier, vol. 53(4), pages 345-358.
When requesting a correction, please mention this item's handle: RePEc:fip:fedreq:y:2010:i:2q:p:123-151:n:v.96no.2. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Pascasio)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.