Inferring Policy Objectives from Economic Outcomes

Inferring Policy Objectives from Economic Outcomes

Estimated policy rules are reduced‐form equations that are silent on many important policy questions. However, a structural understanding of monetary policy can be obtained by estimating a policymaker's objective function. The paper derives conditions under which the parameters in a policymaker...

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Bibliographic Details
Published in:Oxford bulletin of economics and statistics Vol. 66; no. s1; pp. 735 - 764
Main Author: Dennis, Richard
Format: Journal Article
Language:English
Published: Oxford, UK and Malden, USA Blackwell Publishing Ltd 01-09-2004
Subjects:
C32
C61
E52
E58
Economic policy
Economic theory
Keynesian theory
Studies
United States > US
Online Access:Get full text
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Summary:Estimated policy rules are reduced‐form equations that are silent on many important policy questions. However, a structural understanding of monetary policy can be obtained by estimating a policymaker's objective function. The paper derives conditions under which the parameters in a policymaker's policy objective function can be identified and estimated. We apply these conditions to a New Keynesian sticky‐price model of the US economy. The results show that the implicit inflation target and the relative weight placed on interest rate smoothing both declined when Paul Volcker was appointed Federal Reserve chairman.
Bibliography:ArticleID:OBES100_1
istex:89599D92388100404692B3A3D81AE9E23DB98EB2
I would like to thank the seminar participants at the Bank of Canada and the Midwest Econometrics Workshop 2003 for comments. The views expressed in this paper do not necessarily reflect those of the Federal Reserve Bank of San Francisco or the Federal Reserve System.
ark:/67375/WNG-K73RGBD1-J
ISSN:0305-9049
1468-0084
DOI:10.1111/j.1468-0084.2004.100_1.x