Working Paper: NBER ID: w22693
Authors: Michael T. Belongia; Peter N. Ireland
Abstract: A vector autoregression with time-varying parameters is used to characterize changes in Federal Reserve policy that occurred from 2000 through 2007 and describe how they affected the performance of the U.S. economy. Declining coefficients in the model’s estimated policy rule point to a shift in the Fed’s emphasis away from stabilizing inflation over this period. More importantly, however, the Fed held the federal funds rate persistently below the values prescribed by this rule. Under this more discretionary policy, inflation overshot its target and the funds rate followed a path reminiscent of the "stop-go" pattern that characterized Fed behavior prior to 1979.
Keywords: Monetary Policy; Federal Reserve; Inflation; Great Recession
JEL Codes: C32; E31; E32; E37; E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Shift in Federal Reserve policy from 2000 to 2007 (E52) | Higher inflation rates (E31) |
| Federal funds rate held below prescribed levels (E52) | Inflation overshooting its target (E31) |
| Deviations from the policy rule (E61) | Onset of the Great Recession (F65) |
| Stricter adherence to the policy rule (E61) | Lower and more stable inflation (E31) |