Revealing the preferences of the US Federal Reserve
Article first published online: 2 JUL 2010
Copyright © 2010 John Wiley & Sons, Ltd.
Journal of Applied Econometrics
Volume 27, Issue 3, pages 440–473, April/May 2012
How to Cite
Ilbas, P. (2012), Revealing the preferences of the US Federal Reserve. J. Appl. Econ., 27: 440–473. doi: 10.1002/jae.1199
- Issue published online: 4 MAR 2012
- Article first published online: 2 JUL 2010
- Manuscript Revised: 29 APR 2010
- Manuscript Received: 27 MAY 2008
We use Bayesian methods to estimate changes in US post-war monetary policy in the Smets and Wouters model. We perform the estimations by allowing for a break in monetary policy at the time of Volcker's appointment as chairman. This enables us to capture changes in the monetary policy regime introduced by Volcker during the Volcker–Greenspan period. We find support for the assumption that monetary policy in the Volcker–Greenspan period performed optimally under commitment. Our estimation strategy allows us to estimate the preferences of the US Federal Reserve in the Volcker–Greenspan period, where the main objective of policy appears to be inflation, followed by interest rate stabilization, output growth and interest rate smoothing. We find that the Great Moderation of output growth is explained by a combination of two factors: the decrease in the volatility of the structural shocks and the improved monetary policy conduct. Inflation Stabilization, however, is mainly due to the change in monetary policy that took place at the beginning of Volcker's mandate. Copyright © 2010 John Wiley & Sons, Ltd.