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Regime switching and monetary policy measurement

  • Michael T. Owyang
  • Garey Ramey

This paper applies regime-switching methods to the problem of measuring monetary policy. Policy preferences and structural factors are specified parametrically as independent Markov processes. Interaction between the structural and preference parameters in the policy rule serves to identify the two processes. The estimates uncover policy episodes that are initiated by switches to "dove regimes," shown to Granger-cause both NBER recessions and the Romer dates. These episodes imply real effects of monetary policy that are smaller than those found in previous studies.

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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2001-002.

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Date of creation: 2003
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Publication status: Published in Journal of Monetary Economics, November 2004, 51(8), pp. 1577-1598
Handle: RePEc:fip:fedlwp:2001-002
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