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How credible is the Federal Reserve?:A structural estimation of policy re-optimizations

Listed author(s):
  • Aeimit Lakdawala

    (Michigan State University)

  • Davide Debortoli

    (University of California, San Diego)

Using a Markov-switching Bayesian likelihood approach, we examine the behavior of the Federal Reserve over the post WWII period. We estimate a medium-scale macroeconomic model, where monetary policy is chosen by a central bank endowed with a commitment technology, and where a regime-switching process governs occasional re-optimizations of announced plans. Our estimates show that deviations from commitment plans were rather infrequent: seven main re-optimization episodes are identified, at times consistent with conventional narrative accounts of the US monetary history. Our framework is used to discuss the role of policy re-optimizations as sources monetary policy shocks, and to assess the importance of central bank credibility through counterfactual analysis.

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Paper provided by Society for Economic Dynamics in its series 2013 Meeting Papers with number 1333.

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Date of creation: 2013
Handle: RePEc:red:sed013:1333
Contact details of provider: Postal:
Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

Web page: http://www.EconomicDynamics.org/
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