Varying monetary policy regimes: A vector autoregressive investigation |
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Authors: | Michael S. Hanson |
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Affiliation: | aWesleyan University, Department of Economics, 238 Church Street, Middletown, CT 06459-0007, United States |
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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 2 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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Keywords: | Monetary policy reaction function Structural VAR models Taylor rule Volcker disinflation Parameter instability |
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