Time-Consistency Problem and the Behavior of US Inflation from 1970 to 2008
The restrictions implied by the theory of time-consistent monetary policy are imposed on empirical data. Model estimation is conducted using Bayesian Markov chain Monte Carlo techniques. We are able to identify two major regimes regarding the policy of the Federal Reserve from 1970 to 2008. Results show that the Federal Reserve places more weight on inflation stabilization throughout the bigger part of the 1980s and 1990s while on the other hand the Federal Reserve is pursuing a policy of placing more weight on its goals for unemployment reduction in the 1970s and from 2003 to 2008.
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