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Time-Varying Coefficients in a GMM Framework: Estimation of a Forward Looking Taylor Rule for the Federal Reserve

  • Partouche, H.
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    This article deals with the estimation of a time-varying coefficients equation with endogenous regressors. A non-parametric approach is proposed, combining the Generalized Method of Moments (GMM) with the smoothing splines litterature as in Hodrick and Prescott (1981). This new method is used to analyze the evolution of a forward-looking Taylor rule for the Federal Reserve (FED) from 1960 until 2006. It suggests that monetary policy accommodated inflation during the 60s and the 70s whereas the chairmanship of P. Volcker was a turning point toward a more aggressive stance on inflation. In addition, monetary policy became more and more countercyclical.

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    File URL: http://www.banque-france.fr/uploads/tx_bdfdocumentstravail/ner177.pdf
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    Paper provided by Banque de France in its series Working papers with number 177.

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    Length: 39 pages
    Date of creation: 2007
    Date of revision:
    Handle: RePEc:bfr:banfra:177
    Contact details of provider: Postal: Banque de France 31 Rue Croix des Petits Champs LABOLOG - 49-1404 75049 PARIS
    Web page: http://www.banque-france.fr/

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    1. ., 2003. "Introduction," Chapters, in: State and Local Finances under Pressure, chapter 1 Edward Elgar.
    2. Athanasios Orphanides, 2001. "Monetary policy rules, macroeconomic stability and inflation: a view from the trenches," Finance and Economics Discussion Series 2001-62, Board of Governors of the Federal Reserve System (U.S.).
    3. Sowell, Fallaw, 1996. "Optimal Tests for Parameter Instability in the Generalized Method of Moments Framework," Econometrica, Econometric Society, vol. 64(5), pages 1085-1107, September.
    4. ., 2003. "Introduction," Chapters, in: Trade and Development, chapter 1 Edward Elgar.
    5. 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.
    6. Jondeau E. & Le Bihan H. & Galles C., 2004. "Assessing Generalized Method-of-Moments Estimates of the Federal Reserve Reaction Function," Journal of Business & Economic Statistics, American Statistical Association, vol. 22, pages 225-239, April.
    7. Schlicht, Ekkehart, 2004. "Estimating the Smoothing Parameter in the So-Called Hodrick-Prescott Filter," IZA Discussion Papers 1054, Institute for the Study of Labor (IZA).
    8. Laurence M. Ball, 2006. "Has Globalization Changed Inflation?," NBER Working Papers 12687, National Bureau of Economic Research, Inc.
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