STABILITY AND INSTABILITY IN US MONETARY POLICY BEHAVIOR

Abstract

A monetary policy reaction function is estimated, allowing for several possible patterns of time variation in both its coefficients and its disturbance variances. A clear improvement in fit over a fixed-parameter linear model is found. The strongest effect on likelihood is from time variation in variances, but there are also improvements in fit from allowing coefficient variation. The variation is estimated as evolving in a stochastic, repeating pattern, not as evolution from one style of policy at mid-century and a new style in the 90’s. The “regime shifts” that are estimated to occur do not last very long, and appear to reflect temporary shifts in the level of policy activism, not systematic improvement.

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