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UNCERTAINTY AND MONETARY POLICY RULES IN THE UNITED STATES
Author(s) -
MARTIN CHRISTOPHER,
MILAS COSTAS
Publication year - 2009
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1111/j.1465-7295.2008.00160.x
Subject(s) - basis point , economics , interest rate , monetary policy , taylor rule , econometrics , macroeconomics , state (computer science) , monetary economics , central bank , mathematics , algorithm
This article analyzes the impact of uncertainty about the true state of the economy on monetary policy rules in the United States since the early 1980s. Extending the Taylor rule to allow for this type of uncertainty, we find evidence that the predictions of the theoretical literature on responses to uncertainty are reflected in the behavior of policymakers, suggesting that policymakers are adhering to prescriptions for optimal policy. Our estimates suggest that the effect of uncertainty on interest rates was most marked in 1983, when uncertainty increased interest rates by up to 140 basis points, in 1990–1991, when uncertainty reduced interest rates by up to 80 basis points, and in 1996–2001, when uncertainty reduced interest rates by up to 70 basis points over 5 yr. ( JEL C51, C52, E52, E58)