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Monetary regime switches and unstable objectives

  • Davide Debortoli
  • Ricardo Nunes

Monetary policy objectives and targets are not necessarily stable over time. The regime switching literature has typically analyzed and interpreted changes in policymakers' behavior through simple interest rate rules. This paper analyzes policy regime switches explicitly modeling policymakers' behavior and objectives. We show how current monetary policy is affected and should optimally respond to alternative regimes. We also show that changes in the parameters of simple rules do not necessarily correspond to changes in policymakers' preferences. In fact, capturing and interpreting regime changes in preferences through interest rate rules can lead to misleading results.

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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 1036.

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Date of creation: 2011
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Handle: RePEc:fip:fedgif:1036
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