How Credible Is the Federal Reserve? A Structural Estimation of Policy Re-optimizations
American Economic Journal: Macroeconomics
vol. 8,
no. 3, July 2016
(pp. 42-76)
Abstract
The paper proposes a new measure of the degree of credibility of the Federal Reserve. We estimate a medium-scale macroeconomic model, where the central bank has access to a commitment technology, but where a regime-switching process governs occasional re-optimizations of announced plans. The framework nests the commonly used discretion and commitment cases, while allowing for a continuum of intermediate cases. Our estimates reject both full-commitment and discretion. We instead identify occasional re-optimization episodes both before and during the Great Moderation period. Finally, through counterfactual analyses we assess the role of credibility over the past four decades.Citation
Debortoli, Davide, and Aeimit Lakdawala. 2016. "How Credible Is the Federal Reserve? A Structural Estimation of Policy Re-optimizations." American Economic Journal: Macroeconomics, 8 (3): 42-76. DOI: 10.1257/mac.20150029Additional Materials
JEL Classification
- D78 Positive Analysis of Policy Formulation and Implementation
- E31 Price Level; Inflation; Deflation
- E32 Business Fluctuations; Cycles
- E52 Monetary Policy
- E58 Central Banks and Their Policies
- E61 Policy Objectives; Policy Designs and Consistency; Policy Coordination
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