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Varying Monetary Policy Regimes: A Vector Autoregressive Investigation

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Author Info
Michael S. Hanson () (Economics Department, Wesleyan University)

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Abstract

Recently, two stylized facts about the behavior of the U.S. economy have emerged: first, macroeconomic aggregates appear to be less volatile post-1984 than in the preceding two decades; second, monetary policy appears more responsive to inflationary pressures—and thereby more “stabilizing” — during the Volcker/Greenspan chairmanships relative to earlier regimes. Does a causal relationship exist between these two observations? In particular, has “better” policy by the Federal Reserve Board contributed significantly to the lessened volatility of the U.S. economy? This paper uses a structural vector autoregressive (VAR) specification to address these questions, examining the advantages and limitations of such an approach. In contrast with much of the existing research on these topics, I find that most of the quantitatively significant changes in volatility are attributed to breaks in the non-policy portion of the structural VAR, and not to the identified policy equation.

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Publisher Info
Paper provided by Wesleyan University, Department of Economics in its series Wesleyan Economics Working Papers with number 2006-003.

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Length: 31 pages
Date of creation: Jan 2006
Date of revision:
Publication status: Forthcoming in Journal of Economics and Business
Handle: RePEc:wes:weswpa:2006-003

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Related research
Keywords: Monetary policy reaction function; structural VAR models; Taylor rule; Volcker disinflation; parameter instability;

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Find related papers by JEL classification:
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    Other versions:
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    Other versions:
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    Other versions:
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    Other versions:
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  7. Bennett T. McCallum, 1999. "Analysis of the Monetary Transmission Mechanism: Methodological Issues," NBER Working Papers 7395, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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    Other versions:
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    Other versions:
  12. Timothy Cogley & Thomas Sargent, . "Evolving Post-World War II U.S. Inflation Dynamics," Working Papers 2132872, Department of Economics, W. P. Carey School of Business, Arizona State University. [Downloadable!]
    Other versions:
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    Other versions:
  14. Hanson, Michael S., 2004. "The "price puzzle" reconsidered," Journal of Monetary Economics, Elsevier, vol. 51(7), pages 1385-1413, October. [Downloadable!] (restricted)
  15. Fabio Canova & Luca Gambetti, 2003. "Structural changes in the US economy: is there a role for monetary policy?," Economics Working Papers 918, Department of Economics and Business, Universitat Pompeu Fabra, revised Apr 2008. [Downloadable!]
  16. Olivier Blanchard & John Simon, 2001. "The Long and Large Decline in U.S. Output Volatility," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 32(2001-1), pages 135-174. [Downloadable!]
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Neville Francis & Michael T. Owyang, 2004. "Monetary policy in a Markov-switching VECM: implications for the cost of disinflation and the price puzzle," Working Papers 2003-001, Federal Reserve Bank of St. Louis. [Downloadable!]
  2. Eric M. Leeper & Tao Zha, 2000. "Assessing simple policy rules: a view from a complete macro model," Working Paper 2000-19, Federal Reserve Bank of Atlanta. [Downloadable!]
  3. Michael T. Owyang, 2002. "Modeling Volcker as a non-absorbing state: agnostic identification of a Markov-switching VAR," Working Papers 2002-018, Federal Reserve Bank of St. Louis. [Downloadable!]
  4. Eric Leeper & Tao Zha, 2002. "Empirical analysis of policy interventions," Proceedings, Federal Reserve Bank of San Francisco, issue Mar. [Downloadable!]
    Other versions:
  5. Canova, Fabio, 2006. "Monetary Policy and the Evolution of the US Economy," CEPR Discussion Papers 5467, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  6. Canova, Fabio & Gambetti, Luca, 2006. "Structural Changes in the US Economy: Bad Luck or Bad Policy?," CEPR Discussion Papers 5457, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  7. Eric M. Leeper & Tao Zha, 2001. "Assessing simple policy rules: a view from a complete macroeconomic model," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 83-112. [Downloadable!]
    Other versions:
  8. Timothy Cogley & Giorgio E. Primiceri & Thomas J. Sargent, 2008. "Inflation-Gap Persistence in the U.S," NBER Working Papers 13749, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  9. Luca Benati & Paolo Surico, 2006. "The Great Moderation and the ‘Bernanke Conjecture’," Computing in Economics and Finance 2006 158, Society for Computational Economics. [Downloadable!]
  10. Fabio Canova & Luca Gambetti, 2003. "Structural changes in the US economy: is there a role for monetary policy?," Economics Working Papers 918, Department of Economics and Business, Universitat Pompeu Fabra, revised Apr 2008. [Downloadable!]
  11. Fabio Canova, 2004. "What explains the Great Moderation in the US? A structural analysis," Economics Working Papers 919, Department of Economics and Business, Universitat Pompeu Fabra, revised Dec 2007. [Downloadable!]
  12. Christopher Sims & Tao Zha, 2002. "Macroeconomic switching," Proceedings, Federal Reserve Bank of San Francisco, issue Mar. [Downloadable!]
  13. Efrem Castelnuovo, 2006. "Assessing Different Drivers of the GreatModeration in the U.S," "Marco Fanno" Working Papers 0025, Dipartimento di Scienze Economiche "Marco Fanno". [Downloadable!]
  14. Fabio Canova & Luca Gambetti, 2004. "On the Time Variations of US Monetary Policy: Who is right?," Money Macro and Finance (MMF) Research Group Conference 2004 96, Money Macro and Finance Research Group. [Downloadable!]
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