No abstract

The evolution of the U.S. economy over the last 55 years is examined through the lens of a micro-founded model that allows for changes in the behavior of the Federal Reserve and in the volatility of structural shocks. Agents are aware of the possibility of regime changes and their beliefs matter for the law of motion underlying the macroeconomy. Monetary policy is identi…ed by repeated ‡uctuations between a Hawk and a Dove regime, with the latter prevailing in the '70s and during the recent crisis. To explore the role of agents'beliefs I introduce a new class of counterfactual simulations: beliefs counterfactuals. If, in the '70s, agents had anticipated the appointment of an extremely conservative Chairman, in ‡ation would have been lower and the in ‡ationoutput trade-o¤ more favorable. The large drop in in ‡ation and output at the end of 2008 would have been mitigated if agents had expected the Federal Reserve to be exceptionally active in the near future. I would like to thank the editor Enrique Sentana and three anonymous referees for exceptionally thoughtful comments. I am deeply indebted to Chris Sims for his guidance and advice. I am also grateful to

We thank Fernando Martin for sharing his data on the number of meetings between the US Presidents and the Fed Chairmen. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.