How credible is the Federal Reserve?:A structural estimation of policy re-optimizations

Aeimit Lakdawala and Davide Debortoli

No 1333, 2013 Meeting Papers from Society for Economic Dynamics

Abstract: Using a Markov-switching Bayesian likelihood approach, we examine the behavior of the Federal Reserve over the post WWII period. We estimate a medium-scale macroeconomic model, where monetary policy is chosen by a central bank endowed with a commitment technology, and where a regime-switching process governs occasional re-optimizations of announced plans. Our estimates show that deviations from commitment plans were rather infrequent: seven main re-optimization episodes are identified, at times consistent with conventional narrative accounts of the US monetary history. Our framework is used to discuss the role of policy re-optimizations as sources monetary policy shocks, and to assess the importance of central bank credibility through counterfactual analysis.

Date: 2013
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Journal Article: How Credible Is the Federal Reserve? A Structural Estimation of Policy Re-optimizations (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed013:1333

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