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Moment conditions model averaging with an application to a forward-looking monetary policy reaction function

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  • Luis F. Martins

Abstract

In this paper, we examine the empirical validity of the baseline version of the forward-looking monetary policy reaction function proposed by Clarida, Gali, and Gertler (2000). For that purpose, we propose a moment conditions model averaging estimator in the Generalized Method of Moments and Generalized Empirical Likelihood setups. We derive some of their asymptotic properties under correctly specified and misspecified models. Although the model averaging estimates and the standard procedures point to a stabilizing policy rule during the Paul Volcker and Alan Greenspan tenures but not so during the pre-Volker period, our results cast serious doubts on the significance of the cyclical output variable as a forcing variable in the FED funds dynamics during the Volcker-Greenspan period.

Suggested Citation

  • Luis F. Martins, 2011. "Moment conditions model averaging with an application to a forward-looking monetary policy reaction function," Working Papers w201116, Banco de Portugal, Economics and Research Department.
    • Handle: RePEc:ptu:wpaper:w201116
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    References listed on IDEAS

    as
    1. Wouter Denhaan & Andrew T. Levin, 1996. "VARHAC Covariance Matrix Estimator (GAUSS)," QM&RBC Codes 64, Quantitative Macroeconomics & Real Business Cycles.
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    More about this item

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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