On the need for a new approach to analyzing monetary policy

Andrew Atkeson and Patrick Kehoe

No 412, Staff Report from Federal Reserve Bank of Minneapolis

Abstract: We present a pricing kernel that summarizes well the main features of the dynamics of interest rates and risk in postwar U.S. data and use it to uncover how the pricing kernel has moved with the short rate. Our findings imply that standard monetary models miss an essential link between the central bank instrument and the economic activity that monetary policy is intended to affect, and thus we call for a new approach to monetary policy analysis. We sketch a new approach using an economic model based on our pricing kernel. The model incorporates the key relationships between policy and risk movements in an unconventional way: the central bank?s policy changes are viewed as primarily intended to compensate for exogenous business cycle fluctuations in risk that threaten to push inflation off target. This model, while an improvement over standard models, is considered just a starting point for their revision.

Keywords: Taylor's rule; Asset pricing; Risk (search for similar items in EconPapers)
Date: 2008
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (26)

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Related works:
Chapter: On the Need for a New Approach to Analyzing Monetary Policy (2009)
Working Paper: On the need for a new approach to analyzing monetary policy (2008)
Working Paper: On the Need for a New Approach to Analyzing Monetary Policy (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedmsr:412

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