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Modest policy interventions

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  • Eric M. Leeper
  • Tao Zha

Abstract

The authors present a theoretical and empirical framework for computing and evaluating linear projections conditional on hypothetical paths of monetary policy. A modest policy intervention does not significantly shift agents' beliefs about policy regime and does not induce the changes in behavior that Lucas (1976) emphasizes. Applied to an econometric model of U.S. monetary policy, the authors find that a rich class of interventions routinely considered by the Federal Reserve is modest and their impacts can be reliably forecast by an identified linear model. Modest interventions can shift projected paths and probability distributions of macro variables in economically meaningful ways.

Suggested Citation

  • Eric M. Leeper & Tao Zha, 2003. "Modest policy interventions," FRB Atlanta Working Paper 2003-24, Federal Reserve Bank of Atlanta.
  • Handle: RePEc:fip:fedawp:2003-24
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    More about this item

    Keywords

    Equilibrium (Economics); Monetary policy; Macroeconomics; Inflation (Finance); Econometric models;
    All these keywords.

    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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