How optimal is US monetary policy?

Chen, X., Kirsanova, T. and Leith, C. (2017) How optimal is US monetary policy? Journal of Monetary Economics, 92, pp. 96-111. (doi: 10.1016/j.jmoneco.2017.09.009)

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Using a small-scale microfounded DSGE model with Markov switching in shock variances and policy parameters, we show that the data-preferred description of US monetary policy is a time-consistent targeting rule with a marked increase in conservatism after the 1970s. However, the Fed lost its conservatism temporarily in the aftermath of the 1987 stock market crash, and again following the 2000 dot-com crash and has not subsequently regained it. The high inflation of the 1970s would have been avoided had the Fed been able to commit, even without the appointment of Paul Volcker or the reduction in shock volatilities.

Item Type:Articles
Glasgow Author(s) Enlighten ID:Kirsanova, Professor Tatiana and Leith, Professor Campbell
Authors: Chen, X., Kirsanova, T., and Leith, C.
College/School:College of Social Sciences > Adam Smith Business School > Economics
Journal Name:Journal of Monetary Economics
ISSN (Online):1873-1295
Published Online:14 September 2017
Copyright Holders:Copyright © 2017 Elsevier
First Published:First published in Journal of Monetary Economics 92: 96-111
Publisher Policy:Reproduced in accordance with the copyright policy of the publisher.

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