Home About Latest Browse RSS Advanced Search

Federal Reserve Bank of Cleveland
Working Paper
All Fluctuations Are Not Created Equal: The Differential Roles of Transitory versus Persistent Changes in Driving Historical Monetary Policy
Richard Ashley
Kwok Ping Tsang
Randal Verbrugge
Abstract

The historical analysis of FOMC behavior using estimated simple policy rules requires the specification of either an estimated natural rate of unemployment or an output gap. But in the 1970s, neither output gap nor natural rate estimates appear to guide FOMC deliberations. This paper uses the data to identify the particular implicit unemployment rate gap (if any) that is consistent with FOMC behavior. While its ability appears to have improved over time, our results indicate that, both before the Volcker period and through the Bernanke period, the FOMC distinguished persistent movements in the unemployment rate from other movements; implicitly such movements were treated as an intermediate target, one that departs substantially from conventional estimates of the natural rate. We further investigate historical FOMC responses to inflation fluctuations. In this regard, FOMC behavior changed in the Volcker-Greenspan-Bernanke period: its response to the inflation rate became much stronger, and it focused more intensely on very persistent movements in this variable. Our results shed light on the “Great Inflation” experience of the 1970s, and are consistent with the view that political pressures effectively limited the FOMC response to the buildup of inflation. They also suggest new directions for DSGE modeling.


Download Full text
Cite this item
Richard Ashley & Kwok Ping Tsang & Randal Verbrugge, All Fluctuations Are Not Created Equal: The Differential Roles of Transitory versus Persistent Changes in Driving Historical Monetary Policy, Federal Reserve Bank of Cleveland, Working Paper 1814, 12 Oct 2018.
More from this series
JEL Classification:
Subject headings:
Keywords: Taylor rule; Great Inflation; intermediate target; natural rate; persistence; dependence
DOI: 10.26509/frbc-wp-201814
For corrections, contact 4D Library ()
Fed-in-Print is the central catalog of publications within the Federal Reserve System. It is managed and hosted by the Economic Research Division, Federal Reserve Bank of St. Louis.

Privacy Legal