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Modest Policy Interventions

  • Eric M. Leeper
  • Tao Zha

We present a framework for computing and evaluating linear projections of macro variables conditional on hypothetical paths of monetary policy. A modest policy intervention is a change in policy that does not significantly shift agents' beliefs about policy regime and does not generate quantitatively important expectations-formation effects of the kind Lucas (1976) emphasizes. The framework is applied to an econometric model of U.S. postwar monetary policy behavior. It finds that a rich class of interventions routinely considered by the Federal Reserve are modest and their impacts can be reliably forecasted by an accurately identified linear model. Moreover, modest interventions can matter: they may shift the projected paths and probability distributions of macro variables in economically meaningful ways.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9192.

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Date of creation: Sep 2002
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Publication status: published as Leeper, Eric M. and Tao Zha. "Modest Policy Interventions," Journal of Monetary Economics, 2003, v50(8,Nov), 1673-1700.
Handle: RePEc:nbr:nberwo:9192
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