How Optimal is US Monetary Policy?

Chen, X.; Kirsanova, T.; Leith, C.

doi:10.1016/j.jmoneco.2017.09.009

How Optimal is US Monetary Policy?

Chen, X.; Kirsanova, T.; Leith, C.

Authors

Dr Xiaoshan Chen xiaoshan.chen@durham.ac.uk
Associate Professor

T. Kirsanova

C. Leith

Abstract

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.

Citation

Chen, X., Kirsanova, T., & Leith, C. (2017). How Optimal is US Monetary Policy?. Journal of Monetary Economics, 92, 96-111. https://doi.org/10.1016/j.jmoneco.2017.09.009

Journal Article Type	Article
Acceptance Date	Sep 8, 2017
Online Publication Date	Sep 14, 2017
Publication Date	2017-12
Deposit Date	Sep 11, 2017
Publicly Available Date	Sep 14, 2019
Journal	Journal of Monetary Economics
Print ISSN	0304-3932
Publisher	Elsevier
Peer Reviewed	Peer Reviewed
Volume	92
Pages	96-111
DOI	https://doi.org/10.1016/j.jmoneco.2017.09.009
Public URL	https://durham-repository.worktribe.com/output/1376786

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© 2017 This manuscript version is made available under the CC-BY-NC-ND 4.0 license http://creativecommons.org/licenses/by-nc-nd/4.0/