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The policy preferences of the U.S. Federal Reserve

  • Richard Dennis

This paper uses a small data-consistent model of the United States to identify and estimate the Federal Reserve's policy preferences. We find critical differences between the policy regimes in operation during the Burns-Miller and Volcker-Greenspan periods. Over the Volcker-Greenspan period we estimate the inflation target to be 2.0% and find that policymakers were willing to allow the real interest rate to change in order to keep overall changes in the nominal interest rate relatively small. In contrast, for the Burns-Miller period the inflation target is estimated to be 5.9%, and we find that policy makers were much more prepared to tolerate changes in the nominal interest rate than they were changes in the real interest rate. Consequently, over this period policymakers tended to accommodate movements in inflation. We find statistical evidence that a policy regime shift occurred with Volcker's appointment to Federal Reserve chairman.

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Paper provided by Federal Reserve Bank of San Francisco in its series Working Paper Series with number 2001-08.

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Date of creation: 2001
Date of revision:
Handle: RePEc:fip:fedfwp:2001-08
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  13. Andrew Levin & Volker Wieland & John C. Williams, 1998. "Robustness of simple monetary policy rules under model uncertainty," Finance and Economics Discussion Series 1998-45, Board of Governors of the Federal Reserve System (U.S.).
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  19. John B. Taylor, 1999. "A Historical Analysis of Monetary Policy Rules," NBER Chapters, in: Monetary Policy Rules, pages 319-348 National Bureau of Economic Research, Inc.
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  23. Carlo A. Favero, . "Macroeconomic stability and the preferences of the Fed. A formal analysis, 1961-98," Working Papers 200, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  24. Arturo Estrella & Jeffrey C. Fuhrer, 2002. "Dynamic Inconsistencies: Counterfactual Implications of a Class of Rational-Expectations Models," American Economic Review, American Economic Association, vol. 92(4), pages 1013-1028, September.
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  26. Brian Sack & Volker Wieland, 1999. "Interest-rate smoothing and optimal monetary policy: a review of recent empirical evidence," Finance and Economics Discussion Series 1999-39, Board of Governors of the Federal Reserve System (U.S.).
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  29. Richard Dennis, 2003. "Inferring policy objectives from economic outcomes," Working Paper Series 2003-05, Federal Reserve Bank of San Francisco.
  30. Ozlale, Umit, 2003. "Price stability vs. output stability: tales of federal reserve administrations," Journal of Economic Dynamics and Control, Elsevier, vol. 27(9), pages 1595-1610, July.
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