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Nonlinearity in the Fed's Monetary Policy Rule

  • Kim, Dong Heon

    (University of Manchester)

  • Denise R Osborn
  • Marianne Sensier

This paper investigates the nature of nonlinearities in the monetary policy rule of the US Fed using the flexible approach of Hamilton (2001a). We find that while there is significant evidence of nonlinearity for the period to 1979, there is little such evidence for the subsequent period. Possible asymmetries in the Fed's reactions to inflation deviations from target and the output gap in the 1960s and 70s may tell part of the story, but do not capture the entire nature of the nonlinearity. The inclusion of the interaction between inflation deviations and the output gap, as recently proposed, appears to characterize the nonlinear policy rule more adequately.

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Paper provided by Royal Economic Society in its series Royal Economic Society Annual Conference 2003 with number 121.

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Date of creation: 04 Jun 2003
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Handle: RePEc:ecj:ac2003:121
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