Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory

Abstract

We estimate a forward-looking monetary policy reaction function for the postwar US economy, pre- and post-October 1979. Our results point to substantial differences in the estimated rule across periods. In particular, interest rate policy in the Volcker-Greenspan period appears to have been much more sensitive to changes in expected inflation than in the pre-Volcker period. We then compare some of the implications of the estimated rules for equilibrium properties of inflation and output, using a simple macroeconomic model. The pre-Volcker rule is shown to be consistent with the possibility of persistent, self-fulfilling fluctuations in inflation and output. In contrast, the Volcker-Greenspan rule is stabilizing.

Cite this

Richard H. Clarida, Jordi Galí Y, Mark L. Gertler (1998). Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory. National Bureau of Economic Research. https://doi.org/10.3386/w6442

@article{h1998monetary,
  title  = {Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory},
  author = {Clarida, Richard H. and Y, Jordi Galí and Gertler, Mark L.},
  year   = {1998},
  journal = {National Bureau of Economic Research},
  doi    = {10.3386/w6442}
}

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