The Fed's Conduct of Monetary Policy: Has it Changed and Does it Matter?

Preprint
Publisher Website
Google Scholar
Abstract
This paper investigates changes in the conduct of U.S. monetary policy. Monetary policy is modeled in the context of the Bernanke-Mihov (1998) structural VAR (SVAR) extended to allow explicitly for the Fed's forward looking behavior. This is achieved by including its real-time forecasts on inflation and unemployment (the "Greenbook" forecasts). Stability tests that exploit the SVAR identifying restriction indicate significant time variation. Since a central goal is to characterize the economic relevance of the identified changes, the paper shows how the estimation of a flexible time varying parameter model can be implemented in a SVAR using the median-unbiased estimation procedure developed by Stock and Watson (1998). The results suggest an important shift towards a greater response to inflation relative to unemployment, which might have been accompanied by an increase in its targeted level. While the bulk of these changes were brought about under Volcker, they fail to explain the high interest rates and the recession of the early 80's. Together with the results obtained for the period around the 1990 recession, changes in monetary policy, defined in the strict context of the identified policy rule, do not appear to be important in the explanation of business cycle fluctuations.

This publication has 40 references indexed in Scilit: