Premium
Inferring Policy Objectives from Economic Outcomes *
Author(s) -
Dennis Richard
Publication year - 2004
Publication title -
oxford bulletin of economics and statistics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.131
H-Index - 73
eISSN - 1468-0084
pISSN - 0305-9049
DOI - 10.1111/j.1468-0084.2004.100_1.x
Subject(s) - economics , monetary policy , inflation (cosmology) , new keynesian economics , smoothing , function (biology) , keynesian economics , interest rate , macroeconomics , price setting , econometrics , monetary economics , microeconomics , mathematics , statistics , physics , evolutionary biology , theoretical physics , biology
Estimated policy rules are reduced‐form equations that are silent on many important policy questions. However, a structural understanding of monetary policy can be obtained by estimating a policymaker's objective function. The paper derives conditions under which the parameters in a policymaker's policy objective function can be identified and estimated. We apply these conditions to a New Keynesian sticky‐price model of the US economy. The results show that the implicit inflation target and the relative weight placed on interest rate smoothing both declined when Paul Volcker was appointed Federal Reserve chairman.