Working Paper: CEPR ID: DP3211
Authors: Jordi Gal; J David López-Salido; Javier Valls
Abstract: The purpose of the present Paper is twofold. First, we characterize the Fed?s systematic response to technology shocks and its implications for US output, hours and inflation. Second we evaluate the extent to which those responses can be accounted for by a simple monetary policy rule (including the optimal one) in the context of a standard business cycle model with sticky prices. Our main results can be described as follows: First, we detect significant differences across periods in the response of the economy (as well as the Fed?s) to a technology shock. Second, the Fed?s response to a technology shock in the Volcker-Greenspan period is consistent with an optimal monetary policy rule. Third, in the pre-Volcker period the Fed?s policy tended to over stabilize output at the cost of generating excessive inflation volatility. Our evidence reinforces recent results in the literature suggesting an improvement in the Fed?s performance.
Keywords: Fed behaviour; Monetary targeting; Optimal monetary policy; Taylor rule
JEL Codes: E31; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Technology shocks (O33) | Labor productivity (O49) |
| Fed's response during Volcker-Greenspan period (E52) | Stabilization of the economy (E63) |
| Pre-Volcker period Fed's policy (E52) | Excessive inflation volatility (E31) |
| Pre-Volcker period Fed's policy (E52) | Persistent negative output gap (E32) |
| Technology shocks (O33) | Fed's response (E52) |