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Shifting Preferences at the Fed: Evidence from Rolling Dynamic Multipliers and Impulse Response Analysis

Author

Listed:
  • Matthew Greenwood-Nimmo

    () (Leeds University Business School)

  • Yongcheol Shin

    () (Leeds University Business School)

Abstract

The existing empirical literature on Taylor-type interest rate rules has failed to achieve a robust consensus. Indeed, the relatively common finding that the Taylor principle does not hold has fueled a degree of controversy in the field. We attribute these mixed estimation results to a raft of empirical issues from which many existing studies suffer, including bias, inconsistency, endogeneity and a failure to adequately account for the combination of persistent and stationary variables. We propose a new method of combining I(0) and I(1) series in a system setting based on the long-run structural approach of Garratt, Lee, Pesaran and Shin (2006). The application of this method to a long sample of US data provides modest support for the operation of a Taylor-type rule, albeit with considerable inertia. We argue that estimation across rolling windows may better reflect shifts in the underlying preferences of the monetary policymakers at the Federal Reserve. Such rolling estimation provides substantial evidence that the inflation and output preferences of the Fed have varied through time, presumably reflecting the prevailing economic and political conditions, its chairmanship, and the composition of the Federal Open Market Committee. Our most significant finding is that the Taylor Principle was robustly upheld under Volcker, often upheld pre-Volcker but rarely observed post-Volcker over any horizon.

Suggested Citation

  • Matthew Greenwood-Nimmo & Yongcheol Shin, 2010. "Shifting Preferences at the Fed: Evidence from Rolling Dynamic Multipliers and Impulse Response Analysis," IMK Working Paper 16-2010, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
  • Handle: RePEc:imk:wpaper:16-2010
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    File URL: http://www.boeckler.de/pdf/p_imk_wp_16_2010.pdf
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    References listed on IDEAS

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    1. Gerard O'Reilly & Karl Whelan, 2005. "Has Euro-Area Inflation Persistence Changed Over Time?," The Review of Economics and Statistics, MIT Press, vol. 87(4), pages 709-720, November.
    2. Matthew Greenwood-Nimmo & Yongcheol Shin & Till van Treeck, 2010. "The Great Moderation and the Decoupling of Monetary Policy from Long-Term Rates in the U.S. and Germany," IMK Working Paper 15-2010, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
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    Cited by:

    1. Matthew Greenwood-Nimmo & Artur Tarassow, 2013. "A Macroeconometric Assessment of Minsky’s Financial Instability Hypothesis," Macroeconomics and Finance Series 201306, Hamburg University, Department Wirtschaft und Politik.

    More about this item

    Keywords

    System Estimation with Mixed I(0) and I(1) Variables; Long-Run Structural Modelling; Rolling Estimation; Taylor Rule;

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • N10 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - General, International, or Comparative

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