Abstract
The purpose of this paper is to examine the nature of the response by the Federal Reserve to changes in economic conditions. Unlike previous studies, however, the specification of the reaction function for the Federal Reserve employed here will take account of the fact that the marginal response may vary with the severity of economic conditions. Whether or not this is the case is determined by developing a generalized spline estimator. It is found that the Federal Reserve's reaction to economic conditions does indeed vary with the severity of these conditions. The implications of this finding are discussed.
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