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The Evolution of the Monetary Policy Regimes in the U.S

  • Jinho Bae

    ()

    (Department of Economics, Konkuk University, Seoul, South Korea)

  • Chang-Jin Kim

    ()

    (Department of Economics, Korea University, Seoul, South Korea)

  • Dong Heon Kim

    ()

    (Department of Economics, Korea University, Seoul, South Korea)

The existing literature on U.S. monetary policy provides no sense of a cnsensus regarding the existence of a monetary policy regime. This paper explores the evolution of U.S. monetary policy regimes via the development of a Markov-switching model predicated on narrative and statistical evidence of a monetary policy regime. We identified five regimes for the period spanning 1956:I - 2005:IV and they roughly corresponded to the Chairman term of the Federal Reserve, except for the Greenspan era. More importantly, we demonstrate that the conflicting results regarding the response to inflation for the pre-Volcker period in the existing literature is not attributable to the different data but due to different samples, and also provided an insight regarding the Great Inflation?namely, that the near non-response to inflation in the early 1960s appears to have constituted the initial seed of the Great Inflation. We also find via analysis of the Markov-switching model for the U.S. real interest rate, that the regime changes in the real interest rate follow the regime changes in monetary policy within two years and that the evolution of real interest rate regimes provides a good explanation for the conflicting results regarding the dynamics of real interest rate.

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Paper provided by Institute of Economic Research, Korea University in its series Discussion Paper Series with number 1102.

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Date of creation: 2011
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Handle: RePEc:iek:wpaper:1102
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