Working Paper: NBER ID: w8785
Authors: Laurence Ball; Robert Tchaidze
Abstract: This paper seeks to understand the behavior of Greenspan's Federal Reserve in the late 1990s. Some authors suggest that the Fed followed a simple 'Taylor rule,' while others argue that it deviated from such a rule because it recognized that the 'New Economy' permitted an easing of policy. We find that a Taylor rule based on inflation and unemployment does break down in the late 1990s. However, the Fed's behavior appears stable once one accounts for the falling NAIRU of the period. A rule based on inflation and the deviation of unemployment from the NAIRU captures the Fed's behavior through the entire period from 1987 to 2000.
Keywords: No keywords provided
JEL Codes: E58; E65; N12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| NAIRU (E24) | Fed's interest rate decisions (E52) |
| Fed's understanding of NAIRU (E31) | lower interest rates despite falling unemployment (E43) |
| NAIRU fell during late 1990s (F66) | lower predicted interest rate according to modified Taylor rule (E43) |
| Taylor rule based on inflation and unemployment (E31) | Fed behavior (1987-1995) (E52) |
| Taylor rule based on inflation and unemployment (E31) | Fed behavior (after 1995) (E52) |
| Modified Taylor rule (with NAIRU) (E19) | Fed's interest rate decisions (E52) |