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Inferring monetary policy objectives with a partially observed state

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  • Givens, Gregory
  • Salemi, Michael

Abstract

Accounting for the uncertainty inherent in real-time perceptions of the state of the economy is believed to be critical for the analysis of historical monetary policy. We investigate this claim through the lens of a small-scale new-Keynesian model with optimal discretionary policy and partial information about the state. The model is estimated using maximum likelihood on US data over the Volcker-Greenspan-Bernanke regime. A comparison of our estimates to those from a version of the model with complete information reveals that under partial information: (i) the Federal Reserve demonstrates a significant concern for stabilizing fluctuations in the output gap, and (ii) the discrepancy between optimal and observed policy behavior is smaller.

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  • Givens, Gregory & Salemi, Michael, 2012. "Inferring monetary policy objectives with a partially observed state," MPRA Paper 39353, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:39353
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    1. Lubik, Thomas A. & Matthes, Christian, 2016. "Indeterminacy and learning: An analysis of monetary policy in the Great Inflation," Journal of Monetary Economics, Elsevier, vol. 82(C), pages 85-106.
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    4. Chakrabarti, Anindya S. & Kumar, Sudarshan, 2019. "A computational algorithm to analyze unobserved sequential reactions of the central banks: Inference on complex lead-lag relationship in evolution of policy stances," IIMA Working Papers WP 2019-06-02, Indian Institute of Management Ahmedabad, Research and Publication Department.

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    More about this item

    Keywords

    Partial Information; Optimal Monetary Policy; Central Bank Preferences;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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