Revealed Preference of the Federal Reserve: Using Inverse-Control Theory to Interpret the Policy Equation of a Vector Autoregression

Salemi, Michael K.

doi:10.1080/07350015.1995.10524616

Cited by 33 publications

(27 citation statements)

References 30 publications

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“…In earlier work, Salemi (1995) obtains similar results. Unlike Salemi's unconstrained VAR, however, the model presented here adds restrictions that give each equation a structural interpretation.…”

Section: Introductionsupporting

confidence: 73%

Price stability vs. output stability: tales of federal reserve administrations

Özlale

2003

Journal of Economic Dynamics and Control

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This study disentangles policy parameters from those describing private sector behavior by simultaneously estimating an empirical model for in ation and output along with a loss function for the last three Federal Reserve administrations. Three important results emerge: First, the Federal Reserve appears to put more emphasis on price stability than output stability when the entire sample is considered. Second, and more importantly, the loss function parameters exhibit structural break at the time Paul Volcker was appointed chairman. The accommodative characteristics of monetary policy were replaced with a more active policy towards controlling in ation. Finally, interest rate smoothing is found to be an important feature of the monetary policymaking process for all three administrations. ?

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Section: Introductionsupporting

confidence: 73%

Price stability vs. output stability: tales of federal reserve administrations

Özlale

2003

Journal of Economic Dynamics and Control

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“…With a slightly different underlying representation of the economy, Cecchetti, Flores-Lagunes, and Krause (2001) find negligible values for sub-samples regarding the '80s and '90s, while Cecchetti and Ehrmann (2001)'s results support a value of about 1/4. For the same period, but with a VAR representation of the economy, Salemi (1995) finds very low relative weights for the output gap with respect to inflation. Finally, Dennis (2003) designs a hybrid representation of the economy, and estimate a value equal to zero.…”

Section: Econometric Strategymentioning

confidence: 99%

Squeezing the Interest Rate Smoothing Weight with a Hybrid Expectations Model

Castelnuovo

2003

SSRN Journal

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. The rationale for this argument is not straightforward. Indeed, there has been a lively debate about it in the literature. In this paper we perform an empirical exercise to evaluate the relationship existing between private sector's rational expectations and interest rate gradualism. Our findings strongly support rational expectations as an element capable to remarkably reduce the importance of the interest rate smoothing weight in replicating the observed path of the federal funds rate. However, we find a predominance of adaptive expectations in shaping the paths of inflation ad output gap. Our results also suggest that the Fed has followed a 'Strict Inflation Targeting' strategy under Greenspan's regime. Terms of use: Documents in

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“…For example, Salemi (1995) identifies the Fed's loss function parameters in the postWorld War II period using a linear quadratic optimal control structure and assuming that the economy can be described by a vector autoregressive (VAR) model. Ozlale (2003) and Dennis (2006) consider that the economy can be described by the model proposed by Rudebusch and Svensson (1999), using an infinite-horizon quadratic loss function and estimating the Fed's preferences by maximum likelihood.…”

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confidence: 99%

Central Bank preferences and monetary rules under the inflation targeting regime in Brasil

Aragón

Portugal

2009

Brazilian Review of Econometrics

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The estimated interest rate rules are reduced form equations and for that reason they do not directly reveal anything about the structural parameters of monetary policy. In this paper, we seek to further elucidate the Brazilian monetary policy under the inflation targeting regime by calibrating Central Bank preferences. More specifically, we calibrate the policymaker's loss function by choosing the preference parameter values which minimize the deviation between the optimal and actual paths of the basic interest rate (Selic). Our results indicate that the Central Bank has adopted a flexible inflation target regime and placed some greater weight upon inflation stabilization. We also find out that the monetary authority's concern with interest rate smoothing has been far deeper than with output stabilization.

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Revealed Preference of the Federal Reserve: Using Inverse-Control Theory to Interpret the Policy Equation of a Vector Autoregression

Cited by 33 publications

References 30 publications

Price stability vs. output stability: tales of federal reserve administrations

Price stability vs. output stability: tales of federal reserve administrations

Squeezing the Interest Rate Smoothing Weight with a Hybrid Expectations Model

Central Bank preferences and monetary rules under the inflation targeting regime in Brasil

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