Macroeconomic switching

Christopher Sims () and Tao Zha

Proceedings, 2002, issue Mar

Abstract: We discuss the results of fitting a 6-variable structural VAR in which we allow for certain types of parameter variation over time. Allowing structural equation variances to change over time is extremely important in improving fit. Allowing the coefficients that define the model?s dynamics to change is less important to improving fit, though models with changing parameters are consistent with the data. We pay special attention to a version of the model that allows the monetary policy rule, but not other parts of the model, to show changing coefficients. Results from this model fit some aspects of conventional wisdom about changes in monetary policy over time, but imply that the changes in policy have been more subtle than dramatic. We construct counterfactual histories for the early 1980?s, suppressing the ?Volcker regime? in monetary policy. We find a steadier decline in inflation and a smaller recession earlier in the period, but slower growth later, than actually occurred.

Date: 2002
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