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The policy preferences of the US Federal Reserve

  • Richard Dennis

    (Economic Research, Federal Reserve Bank of San Francisco, San Francisco, CA 94105, USA)

In this paper we model and explain US macroeconomic outcomes subject to the discipline that monetary policy is set optimally. Exploiting the restrictions that come from optimal policymaking, we estimate the parameters in the Federal Reserve's policy objective function together with the parameters in its optimization constraints. For the period following Volcker's appointment as chairman, we estimate the implicit inflation target to be around 1.4% and show that policymakers assigned a significant weight to interest rate smoothing. We show that the estimated optimal policy provides a good description of US data for the 1980s and 1990s. Copyright © 2005 John Wiley & Sons, Ltd.

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File URL: http://hdl.handle.net/10.1002/jae.808
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File URL: http://qed.econ.queensu.ca:80/jae/2006-v21.1/
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Article provided by John Wiley & Sons, Ltd. in its journal Journal of Applied Econometrics.

Volume (Year): 21 (2006)
Issue (Month): 1 ()
Pages: 55-77

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Handle: RePEc:jae:japmet:v:21:y:2006:i:1:p:55-77
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  9. Brian Sack & Volker Wieland, 1999. "Interest-rate smoothing and optimal monetary policy: a review of recent empirical evidence," Finance and Economics Discussion Series 1999-39, Board of Governors of the Federal Reserve System (U.S.).
  10. Salemi, Michael K, 1995. "Revealed Preference of the Federal Reserve: Using Inverse-Control Theory to Interpret the Policy Equation of a Vector Autoregression," Journal of Business & Economic Statistics, American Statistical Association, vol. 13(4), pages 419-33, October.
  11. Goodfriend, Marvin, 1991. "Interest rates and the conduct of monetary policy," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 34(1), pages 7-30, January.
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  14. John B. Taylor, 1998. "An Historical Analysis of Monetary Policy Rules," NBER Working Papers 6768, National Bureau of Economic Research, Inc.
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  19. Hansen, Lars Peter & Sargent, Thomas J., 1980. "Formulating and estimating dynamic linear rational expectations models," Journal of Economic Dynamics and Control, Elsevier, vol. 2(1), pages 7-46, May.
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  25. Soderlind, Paul, 1999. "Solution and estimation of RE macromodels with optimal policy," European Economic Review, Elsevier, vol. 43(4-6), pages 813-823, April.
  26. Favero, Carlo A & Rovelli, Riccardo, 2003. " Macroeconomic Stability and the Preferences of the Fed: A Formal Analysis, 1961-98," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(4), pages 545-56, August.
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