Fortune or virtue: time-variant volatilities versus parameter drifting
Jesus Fernandez-Villaverde (),
Pablo Guerron and
Juan F Rubio-Ramirez ()
No 10-14, Working Papers from Federal Reserve Bank of Philadelphia
This paper compares the role of stochastic volatility versus changes in monetary policy rules in accounting for the time-varying volatility of U.S. aggregate data. Of special interest to the authors is understanding the sources of the great moderation of business cycle fluctuations that the U.S. economy experienced between 1984 and 2007. To explore this issue, the authors build a medium-scale dynamic stochastic general equilibrium (DSGE) model with both stochastic volatility and parameter drifting in the Taylor rule and they estimate it non-linearly using U.S. data and Bayesian methods. Methodologically, the authors show how to confront such a rich model with the data by exploiting the structure of the high-order approximation to the decision rules that characterize the equilibrium of the economy. Their main empirical findings are: 1) even after controlling for stochastic volatility (and there is a fair amount of it), there is overwhelming evidence of changes in monetary policy during the analyzed period; 2) however, these changes in monetary policy mattered little for the great moderation; 3) most of the great performance of the U.S. economy during the 1990s was a result of good shocks; and 4) the response of monetary policy to inflation under Burns, Miller, and Greenspan was similar, while it was much higher under Volcker.
Keywords: Monetary policy; Business cycles; Board of Governors of the Federal Reserve System (U.S.); Econometric models (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec, nep-cba, nep-dge and nep-mac
References: Add references at CitEc
Citations: View citations in EconPapers (31) Track citations by RSS feed
Downloads: (external link)
http://www.philadelphiafed.org/research-and-data/p ... ers/2010/wp10-14.pdf (application/pdf)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:fip:fedpwp:10-14
Ordering information: This working paper can be ordered from
Access Statistics for this paper
More papers in Working Papers from Federal Reserve Bank of Philadelphia Contact information at EDIRC.
Bibliographic data for series maintained by Beth Paul ().