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Searching for the FED's Reaction Function

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  • Katrin Woelfel
  • Christoph Weber

Abstract

There is still some doubt about those economic variables that really matter for the FED’s decisions. In comparison to other estimations, this study uses the approach of Bayesian Model Averaging (BMA). The estimations show that over the long run in?ation, unemployment rates, and long-term interest rates are the crucial variables in explaining the Federal Funds Rate. In the other two estimation samples, also the federal de?cit and M2 were of relevance. In addition, we present the best models in more detail. Finally, a model average is constructed via BMA. The model average substantially outperforms a simple Taylor rule.

Suggested Citation

  • Katrin Woelfel & Christoph Weber, 2014. "Searching for the FED's Reaction Function," Working Papers 154, Bavarian Graduate Program in Economics (BGPE).
  • Handle: RePEc:bav:wpaper:154_woelfelweber
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    More about this item

    Keywords

    FED; Monetary Policy Reaction Functions; Model Uncertainty; Bayesian Model Averaging;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • 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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