Monetary policy rules and macroeconomic stability: Evidence and some theory

Richard Clarida, Jordi Galí, Mark Gertler

    Research output: Contribution to journalArticle

    Abstract

    We estimate a forward-looking monetary policy reaction function for the postwar United States economy, before and after Volcker's appointment as Fed Chairman in 1979. Our results point to substantial differences in the estimated rule across periods. In particular, interest rate policy in the Volcker-Greenspan period appears to have been much more sensitive to changes in expected inflation than in the pre-Volcker period. We then compare some of the implications of the estimated rules for the equilibrium properties of inflation and output, using a simple macroeconomic model, and show that the Volcker-Greenspan rule is stabilizing.

    Original languageEnglish (US)
    Pages (from-to)147-180
    Number of pages34
    JournalQuarterly Journal of Economics
    Volume115
    Issue number1
    DOIs
    StatePublished - Feb 2000

    ASJC Scopus subject areas

    • Economics and Econometrics

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