Varying Monetary Policy Regimes: A Vector Autoregressive Investigation

Michael Hanson

No 2006-003, Wesleyan Economics Working Papers from Wesleyan University, Department of Economics

Abstract: Recently, two stylized facts about the behavior of the U.S. economy have emerged: first, macroeconomic aggregates appear to be less volatile post-1984 than in the preceding two decades; second, monetary policy appears more responsive to inflationary pressures—and thereby more “stabilizing” — during the Volcker/Greenspan chairmanships relative to earlier regimes. Does a causal relationship exist between these two observations? In particular, has “better” policy by the Federal Reserve Board contributed significantly to the lessened volatility of the U.S. economy? This paper uses a structural vector autoregressive (VAR) specification to address these questions, examining the advantages and limitations of such an approach. In contrast with much of the existing research on these topics, I find that most of the quantitatively significant changes in volatility are attributed to breaks in the non-policy portion of the structural VAR, and not to the identified policy equation.

Keywords: Monetary policy reaction function; structural VAR models; Taylor rule; Volcker disinflation; parameter instability (search for similar items in EconPapers)
JEL-codes: C32 E31 E52 E58 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2006-01
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (26)

Forthcoming in Journal of Economics and Business

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Journal Article: Varying monetary policy regimes: A vector autoregressive investigation (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:wes:weswpa:2006-003

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