The views expressed in this paper are our own and do not necessarily reflect the views of the European Central Bank (ECB) or its staff. We thank two anonymous referees, the editor, Chris House, and Barbara Rossi for helpful comments.
The Central Banker as a Risk Manager: Estimating the Federal Reserve's Preferences under Greenspan
Article first published online: 12 AUG 2008
© 2008 The Ohio State University
Journal of Money, Credit and Banking
Volume 40, Issue 6, pages 1103–1129, September 2008
How to Cite
KILIAN, L. and MANGANELLI, S. (2008), The Central Banker as a Risk Manager: Estimating the Federal Reserve's Preferences under Greenspan. Journal of Money, Credit and Banking, 40: 1103–1129. doi: 10.1111/j.1538-4616.2008.00150.x
- Issue published online: 12 AUG 2008
- Article first published online: 12 AUG 2008
- Received March 17, 2008; and accepted in revised form March 18, 2008.
- monetary policy;
- policy rule;
We derive a natural generalization of the Taylor rule that links changes in the interest rate to the balance of the risks implied by the dual objective of sustainable economic growth and price stability. This monetary policy rule reconciles economic models of expected utility maximization with the risk management approach to central banking. Within this framework, we formally test and reject the standard assumption of quadratic and symmetric preferences in inflation and output that underlies the derivation of the Taylor rule. Our results suggest that Fed policy decisions under Greenspan were better described in terms of the Fed weighing upside and downside risks to their objectives rather than simply responding to the conditional mean of inflation and of the output gap.