Monetary Policy Rules, Macroeconomic Stability, and Inflation: A View from the Trenches

By Athanasios Orphanides. Social Science Research Network, 2001

433 citations recorded by the source corpus.

I estimate a forward-looking monetary policy reaction function for the Federal Reserve for the periods before and after Paul Volcker's appointment as Chairman in 1979, using information that was available to the FOMC in real time from 1966 to 1995. The results suggest broad similarities in policy and point to a forward-looking approach to policy consistent with a strong reaction to inflation forecasts during both periods. This contradicts the hypothesis, based on analysis with ex post constructed data, that the instability of the Great Inflation was the result of weak FOMC policy responses to expected inflation. A difference is that prior to Volcker's appointment, policy was too activist in reacting to perceived output gaps that retrospectively proved overambitious. Drawing on contemporaneous accounts of FOMC policy, I discuss the implications of the findings for alternative explanations of the Great Inflation and the improvement in macroeconomic stability since then.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/38db24e56128d7f8e7b08d427413a4209501920b

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Citations in the corpus

Opting Out of the Great Inflation: German Monetary Policy after the Break Down of Bretton Woods (2009, positive): “use the real-time perceptions of the US output gap reconstructed by Orphanides (2003). We report results for annual changes in the output gap as well as for its quarterly changes.”
Confidence Sets for the Date of a Single Break in Linear Time Series Regressions (2004, methodology): “From an empirical point of view, the observed p-values are often borderline significant; in the Stock and Watson (1996) study, for instance, the QLR statistic investigated by Andrews (1993) rejects stability of 76 US postwar macroeconomic series for 23 series on the 1% level, for an additional 11 se”
Estimation of a Forward-Looking Monetary Policy Rule: A Time-Varying Parameter Model using Ex-Post Data (2006, neutral): “2 is also in contrast to Orphanides (2004), who suggests that the Fed’s policy response to expected inflation was broadly similar before and after 1979.”
The Fed's monetary policy rule and U.S. inflation: The case of asymmetric preferences (2007, neutral): “Using real-time data Orphanides (2004) finds, however, that the Fed’s response to the output gap was actually more activist in the 1970s when the misperceptions on potential output turned out to be more severe.”
Using Taylor Rules to Understand European Central Bank Monetary Policy (2007, methodology): “A general critique to estimated policy rules such as (2) and (3) has been proposed in a sequence of articles by Orphanides (2001a, 2001b, 2002).”
Self-fulfilling expectations and the inflation of the 1970s: Evidence from the Livingston Survey (2003, background): “See Orphanides (2001) for the role that mismeasurement issues might have played in the economic performance of the 1970s.”
Heterogeneous Expectations in Monetary DSGE Models (2013, neutral): “After having char- 18See, e.g., Taylor (1999), Judd and Rudebusch (1998), Clarida, Gali, and Gertler (2000) and Orphanides (2004). acterized the dynamic feedback system in which aggregate variables and subjective expectations co-evolve over time, we performed a simple monetary policy exercise to…”
Explaining and Forecasting Bond Risk Premiums (2010, background): “economy, however, disagreement about the nature and significance of such structural changes remains (Clarida, Galí, and Gertler 2000; Cogley and Sargent 2002; Orphanides 2004; Sims and Zha 2004).”
The Yield Curve and Macroeconomic Dynamics (2008, neutral): “Many authors, for example, have argued that a break in the Fed s monetary policy rule took place most probably in 1979 (see e.g. Clarida, Galí and Gertler, 2000, and Orphanides, 2004).”
Term Structure Estimation with Survey Data on Interest Rate Forecasts (2005, background): “Rudebusch and Wu (2004) have focused on the case w = 1 month, but this requires data on the 1-month yield, which is not measured very well; Duffee (1996), for example, has noted that the 1-month T-bill yield has a substantial amount of idiosyncratic variation and cautioned against the use of the 1-m”
How the ECB and the US Fed set interest rates (2007, background): “81 with ex post data for the United States for that period, while Orphanides (2001) estimates a forward-looking rule with real-time data and reports 11⁄4 0.”