Policy Regime Changes, Judgment and Taylor rules in the Greenspan Era

Cinzia Alcidi (), Alessandro Flamini () and Andrea Fracasso

Economica, 2011, vol. 78, issue 309, 89-107

Abstract: This paper investigates policy deviations from linear Taylor rules motivated by the risk management approach followed by the Fed during the Greenspan era. We estimate a nonlinear monetary policy rule via a logistic smoothing transition regression model where policy-makers' judgment, proxied by economically meaningful variables, drives the transition across policy regimes. We find that ignoring judgment‐induced nonlinearities while estimating Taylor rules has remarkable costs in terms of fit: above 250 bps in 10 quarters. Although linear Taylor rules describe well the broad contours of monetary policy, they fail to detect relevant policy decisions driven by policy‐makers' judgment.

Date: 2011
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