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Assessing monetary accommodation: a simple empirical model of monetary policy and its implications for unemployment and inflation

Evan Koenig and Alan Armen
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Alan Armen: Federal Reserve Bank of Dallas

Staff Papers, 2015, issue Dec

Abstract: This note suggests that household wealth growth and a long-forward interest rate can be used to construct a simple and convenient reference standard for assessing the current stance of monetary policy. It shows that the difference between the federal funds rate and this reference interest rate is a powerful predictor of the unemployment rate and inflation, producing real-time forecasts that are competitive with consensus-based forecasts from surveys of forecasting professionals. Moreover, one can understand past FOMC policy actions as efforts to adjust the stance of policy, so measured, in response to unemployment and inflation gaps. There is little evidence of inertia in this version of the Taylor rule, in contrast to Taylor-rule specifications that assume a fixed reference real federal funds rate.

Keywords: Unemployment; inflation; neutral rate; Taylor rule; monetary policy; real-time forecasting (search for similar items in EconPapers)
JEL-codes: E24 E27 E31 E37 E43 E47 E52 (search for similar items in EconPapers)
Date: 2015
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