Working Paper: NBER ID: w9192
Authors: Eric M. Leeper; Tao Zha
Abstract: We present a framework for computing and evaluating linear projections of macro variables conditional on hypothetical paths of monetary policy. A modest policy intervention is a change in policy that does not significantly shift agents' beliefs about policy regime and does not generate quantitatively important expectations-formation effects of the kind Lucas (1976) emphasizes. The framework is applied to an econometric model of U.S. postwar monetary policy behavior. It finds that a rich class of interventions routinely considered by the Federal Reserve are modest and their impacts can be reliably forecasted by an accurately identified linear model. Moreover, modest interventions can matter: they may shift the projected paths and probability distributions of macro variables in economically meaningful ways.
Keywords: No keywords provided
JEL Codes: E52; E47; C53
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| modest policy interventions (E65) | do not significantly shift agents' beliefs about the policy regime (E65) |
| modest policy interventions (E65) | do not generate substantial expectations-formation effects (D84) |
| direct effects (F69) | total impact of policy interventions (F68) |
| expectations-formation effects (D84) | total impact of policy interventions (F68) |
| modest interventions (I14) | shift projected paths and probability distributions of macro variables (E17) |
| small but persistent intervention (C92) | destabilize a linear model (C51) |
| large but fleeting intervention (E65) | stabilize a linear model (C51) |
| immodest interventions (H84) | unreliable forecasts due to significant expectations-formation effects (D84) |
| absence of significant expectations-formation effects (D84) | accuracy of forecasts from fixed-regime models (C53) |