How Credible Is the Federal Reserve? A Structural Estimation of Policy Re-optimizations

Davide Debortoli and Aeimit Lakdawala

American Economic Journal: Macroeconomics, 2016, vol. 8, issue 3, 42-76

Abstract: The paper proposes a new measure of the degree of credibility of the Federal Reserve. We estimate a medium-scale macroeconomic model, where the central bank has access to a commitment technology, but where a regime-switching process governs occasional re-optimizations of announced plans. The framework nests the commonly used discretion and commitment cases, while allowing for a continuum of intermediate cases. Our estimates reject both full-commitment and discretion. We instead identify occasional re-optimization episodes both before and during the Great Moderation period. Finally, through counterfactual analyses we assess the role of credibility over the past four decades.

JEL-codes: D78 E31 E32 E52 E58 E61 (search for similar items in EconPapers)
Date: 2016
Note: DOI: 10.1257/mac.20150029
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Citations: View citations in EconPapers (38)

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Working Paper: How credible is the Federal Reserve?:A structural estimation of policy re-optimizations (2013)
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