Searching for the Fed’s reaction function

Katrin Wölfel () and Christoph Weber
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Katrin Wölfel: Friedrich-Alexander-Universität Erlangen-Nürnberg

Empirical Economics, 2017, vol. 52, issue 1, No 9, 227 pages

Abstract: Abstract There is still some doubt about those economic variables that really matter for the Fed’s decisions. In comparison with other estimations, this study uses the approach of Bayesian model averaging (BMA). The estimations show that over the long-run inflation, unemployment rates and long-term interest rates are the crucial variables in explaining the Federal Funds Rate. In the other two estimation samples, also the fiscal deficit and monetary aggregates were of relevance. There is also evidence for interest rate smoothing. In addition, we account for parameter instability by combining BMA with time-varying coefficient (TVC) modelling. We find strong evidence for structural breaks. Finally, a model average is constructed via an TVC-BMA approach.

Keywords: Fed; Monetary policy reaction functions; Model uncertainty; Bayesian model averaging; Parameter instability (search for similar items in EconPapers)
JEL-codes: E43 E52 E58 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (1)

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Working Paper: Searching for the FED's Reaction Function (2014)
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DOI: 10.1007/s00181-016-1076-6

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