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Modest policy interventions

Author

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  • Eric M. Leeper
  • Tao Zha

Abstract

The authors present a framework for computing and evaluating linear projections of macro variables conditional on hypothetical paths of monetary policy. A modest policy intervention is a change in policy that does not significantly shift agents' beliefs about policy regime and does not generate quantitatively important expectations-formation effects of the kind Lucas (1976) emphasizes. The framework is applied to an econometric model of U.S. postwar monetary policy behavior. It finds that a rich class of interventions routinely considered by the Federal Reserve are modest and their impacts can be reliably forecast by an accurately identified linear model. Moreover, modest interventions can matter: They may shift the projected paths and probability distributions of macro variables in economically meaningful ways.

Suggested Citation

  • Eric M. Leeper & Tao Zha, 2002. "Modest policy interventions," FRB Atlanta Working Paper 2002-19, Federal Reserve Bank of Atlanta.
  • Handle: RePEc:fip:fedawp:2002-19
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    More about this item

    Keywords

    Monetary policy ; Forecasting ; Vector autoregression;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications

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