Working Paper: NBER ID: w11314
Authors: Jean Boivin
Abstract: Despite the large amount of empirical research on monetary policy rules, there is surprisingly little consensus on the nature or even the existence of changes in the conduct of U.S. monetary policy. Three issues appear central to this disagreement: 1) the specific type of changes in the policy coefficients, 2) the treatment of heteroskedasticity, and 3) the real-time nature of the data used. This paper addresses these issues in the context of forward-looking Taylor rules with drifting coefficients. The estimation is based on real-time data and accounts for the presence of heteroskedasticity in the policy shock. The findings suggest important but gradual changes in the rule coefficients, not adequately captured by the usual split-sample estimation. In contrast to Orphanides (2002, 2003), I find that the Fed's response to the real-time forecast of inflation was weak in the second half of the 1970's, perhaps not satisfying Taylor's principle as suggested by Clarida, Galìì and Gertler (2000). However, the response to inflation was strong before 1973 and gradually regained strength from the early 1980's onward. Moreover, as in Orphanides (2003), the Fed's response to real activity fell substantially and lastingly during the 1970's.
Keywords: No keywords provided
JEL Codes: E52; C32; C50
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Federal Reserve's response to inflation before 1973 was strong (E52) | Federal Reserve's response to inflation weakened significantly during the second half of the 1970s (E31) |
| Federal Reserve's response to inflation weakened significantly during the second half of the 1970s (E31) | Failure to satisfy the Taylor principle (E19) |
| Response to real activity declined substantially throughout the 1970s (E65) | Federal Reserve's response to inflation weakened significantly during the second half of the 1970s (E31) |
| Transition under Chairman Volcker occurred gradually (E65) | Significant changes in policy responses happened between 1980 and 1982 (E65) |
| Response to inflation stabilized at a level above 2 from the mid-1980s onward (E31) | Response to real activity remained weak (E69) |
| Conduct of monetary policy changed significantly over the past 30 years (E52) | Improved economic outcomes (F69) |