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Dynamic Limited Dependent Variable Modeling and U.S. Monetary Policy
Author(s) -
MONOKROUSSOS GEORGE
Publication year - 2011
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/j.1538-4616.2010.00383.x
Subject(s) - output gap , monetary policy , economics , robustness (evolution) , inflation (cosmology) , keynesian economics , monetary economics , econometrics , macroeconomics , biochemistry , chemistry , physics , theoretical physics , gene
I estimate a forward‐looking, dynamic, discrete‐choice monetary policy reaction function for the U.S. economy that accounts for the fact that there are substantial restrictions in the period‐to‐period changes of the policy instrument. I find a substantial contrast between the periods before and after Paul Volcker's appointment as Fed chairman in 1979, both in terms of the Fed's response to expected inflation and in terms of its response to the (perceived) output gap. In the pre‐Volcker era, the Fed's response to inflation was substantially weaker than in the Volcker–Greenspan era; conversely, the Fed seems to have been more responsive to (inaccurate real‐time estimates of) the output gap in the pre‐Volcker era than later. These results, which carry through a series of extensions and robustness checks, provide support for the “policy mistakes” hypothesis as an explanation of the stark contrast in U.S. macroeconomic performance between the pre‐Volcker and the Volcker–Greenspan periods.