Working Paper: CEPR ID: DP1908
Authors: Richard Clarida; Jordi Gali; Mark Gertler
Abstract: We estimate a forward-looking monetary policy reaction function for the US economy, pre- and post-October 1979. Our results point to substantial differences in the estimated rule across periods. In particular, interest rate policy in the Volcker-Greenspan period appears to have been much more sensitive to changes in expected inflation than in the pre-Volcker period. We then compare some of the implications of the estimated rules for the equilibrium properties of inflation and output, using a simple macroeconomic model. The pre-Volcker rule is shown to be consistent with the possibility of persistent, self-fulfilling fluctuations in inflation and output.
Keywords: monetary policy rules; business cycles; sunspot fluctuations
JEL Codes: E32; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Monetary policy behavior pre-October 1979 (E52) | Macroeconomic performance (E66) |
| Monetary policy behavior post-October 1979 (E52) | Macroeconomic performance (E66) |
| Pre-Volcker rule (G18) | Self-fulfilling fluctuations in inflation and output (E32) |
| Volcker-Greenspan rule (E61) | Stabilization of inflation and output (E63) |
| Change in Federal Reserve's policy reaction function after October 1979 (E52) | Macroeconomic stability (E60) |