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Jean-Yves Gnabo

20 May 2015
We estimate regime switching models where the strength of the response of monetary policy to macroeconomic conditions depends on the level of risk associated with the inflation outlook and risk in financial markets. Using quarterly data for the Greenspan period we find that: i) risk in the inflation outlook and volatility in financial markets are a powerful driver of monetary policy regime changes in the U.S.; ii) the response of the US Fed to the inflation outlook is invariant across policy regimes; iii) however, in periods of high economic risk, monetary policy tends to respond more aggressively to the output gap and the degree of inertia tends to be lower than in normal circumstances; and iv) the US Fed is estimated to have responded aggressively to the output gap in the late 1980s and begging of the 1990s, and in the late 1990s and early 2000s.
JEL Code
C24 : Mathematical and Quantitative Methods→Single Equation Models, Single Variables→Truncated and Censored Models, Switching Regression Models
C51 : Mathematical and Quantitative Methods→Econometric Modeling→Model Construction and Estimation
E52 : Macroeconomics and Monetary Economics→Monetary Policy, Central Banking, and the Supply of Money and Credit→Monetary Policy