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Varying Monetary Policy Regimes: A Vector Autoregressive Investigation

  • Michael S. Hanson

    ()

    (Economics Department, Wesleyan University)

Recently, two stylized facts about the behavior of the U.S. economy have emerged: first, macroeconomic aggregates appear to be less volatile post-1984 than in the preceding two decades; second, monetary policy appears more responsive to inflationary pressures—and thereby more “stabilizing” — during the Volcker/Greenspan chairmanships relative to earlier regimes. Does a causal relationship exist between these two observations? In particular, has “better” policy by the Federal Reserve Board contributed significantly to the lessened volatility of the U.S. economy? This paper uses a structural vector autoregressive (VAR) specification to address these questions, examining the advantages and limitations of such an approach. In contrast with much of the existing research on these topics, I find that most of the quantitatively significant changes in volatility are attributed to breaks in the non-policy portion of the structural VAR, and not to the identified policy equation.

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File URL: http://repec.wesleyan.edu/pdf/mshanson/2006003_hanson.pdf
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Paper provided by Wesleyan University, Department of Economics in its series Wesleyan Economics Working Papers with number 2006-003.

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Length: 31 pages
Date of creation: Jan 2006
Date of revision:
Publication status: Forthcoming in Journal of Economics and Business
Handle: RePEc:wes:weswpa:2006-003
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