TESTING THE OPPORTUNISTIC APPROACH TO MONETARY POLICY

Authors

  • CHRISTOPHER MARTIN,

    1. University of Bath
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    • * 

      Manuscript received 5.3.07; final version received 11.11.08.

  • COSTAS MILAS

    1. Keele University
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    • We thank the Editor, an anonymous referee, Athanasios Orphanides, Simon van Norden, John C. Williams, Gary Koop, Julia Darby and seminar audiences at Brunel and Strathclyde Universities and at the 17th EC2 Conference (Rotterdam) for useful comments and suggestions. We are also grateful to Kalvinder Shields for making the real-time output gap measures used in the Garratt et al. (2008) paper available to us.


Abstract

The opportunistic approach to monetary policy is an influential but untested model of optimal monetary policy. We provide the first tests of the model, using US data from 1983Q1 to 2004Q1. Our results support the opportunistic approach. We find that policy-makers respond to the gap between inflation and an intermediate target that reflects the recent history of inflation. We find that there is no response of interest rates to inflation when inflation is within 1 per cent of the intermediate target but a strong response when inflation is further from the intermediate target.

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