Nonlinearity in the Fed's monetary policy rule
Article first published online: 31 MAR 2005
Copyright © 2005 John Wiley & Sons, Ltd.
Journal of Applied Econometrics
Volume 20, Issue 5, pages 621–639, July/August 2005
How to Cite
Kim, D. H., Osborn, D. R. and Sensier, M. (2005), Nonlinearity in the Fed's monetary policy rule. J. Appl. Econ., 20: 621–639. doi: 10.1002/jae.792
- Issue published online: 27 JUL 2005
- Article first published online: 31 MAR 2005
- Manuscript Revised: 3 FEB 2004
- Manuscript Received: 27 FEB 2003
- Economic and Social Research Council (UK). Grant Number: L138251030.
This paper investigates the nature of nonlinearities in the monetary policy rule of the US Federal Reserve (Fed) using the flexible approach to nonlinear inference. We find that while there is significant evidence of nonlinearity for the period to 1979, there is little such evidence for the subsequent period. Possible asymmetries in the Fed's reactions to inflation deviations from target and the output gap in the 1960s and 1970s may tell part of the story, but do not capture the entire nature of the nonlinearity. The inclusion of the interaction between inflation deviations and the output gap, as recently proposed, appears to characterize the nonlinear policy rule more adequately. Copyright © 2005 John Wiley & Sons, Ltd.