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Were There Regime Switches in U.S. Monetary Policy?

  • Christopher A. Sims

    (Princeton University and NBER)

  • Tao Zha

    (Federal Reserve Bank of Atlanta)

A multivariate model, identifying monetary policy and allowing for simultaneity and regime switching in coefficients and variances, is confronted with US data since 1959. The best fit is with a version that allows time variation in structural disturbance variances only. Among versions that allow for changes in equation coefficients also, the best fit is for a one that allows coefficients to change only in the monetary policy rule. That version allows switching among three main regimes and one rarely and briefly occurring regime. The three main regimes correspond roughly to periods when most observers believe that monetary policy actually differed, but the differences among regimes are not large enough to account for the rise, then decline, in inflation of the 70’s and 80’s. In versions that insist on changes in the policy rule, the estimates imply monetary targeting was central in the early 80’s, but also important sporadically in the 70’s.

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Paper provided by Princeton University, Department of Economics, Center for Economic Policy Studies. in its series Working Papers with number 92.

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Date of creation: May 2005
Date of revision:
Handle: RePEc:pri:cepsud:110sims
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