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How optimal is US monetary policy?

Chen, X. and Kirsanova, T. and Leith, C. (2017) 'How optimal is US monetary policy?', Journal of monetary economics., 92 . pp. 96-111.


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:Article
Full text:(AM) Accepted Manuscript
Available under License - Creative Commons Attribution Non-commercial No Derivatives.
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Publisher statement:© 2017 This manuscript version is made available under the CC-BY-NC-ND 4.0 license
Date accepted:08 September 2017
Date deposited:12 September 2017
Date of first online publication:14 September 2017
Date first made open access:14 September 2019

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