Greenspan Period Research Articles

Central bank and asymmetric preferences: An application of sieve estimators to the U.S. and Brazil

Whether central banks place the same weights on positive and negative deviations of inflation and of the output gap from their respective targets is an interesting question regarding monetary policy. The literature has sought to address this issue using a specific asymmetric function, the so-called Linex loss function. However, is the Linex an actually asymmetric specification? In an attempt to answer this question, we applied the sieve estimation method, a fully nonparametric approach, in which the result could be any proper loss function. This way, our results could corroborate the quadratic or Linex loss functions used in the literature or suggest an entirely new function. We applied the sieve estimation method to the United States and to Brazil, an emergent country which has consistently followed an inflation targeting regime. The economy was modeled with forward-looking agents and central bank commitment. Our results indicate that the FED was more concerned with inflation rates below the target, but no asymmetry was found in the inflation–output process in the Volcker–Greenspan period. As to Brazil, we found asymmetries in output gaps from 2004 onwards, when the Brazilian Central Bank was more concerned with positive output gaps; but we did not find any statistically significant asymmetries in inflation.

Asset prices, monetary policy, and aggregate fluctuations: An empirical investigation

This paper studies empirically the dynamic interactions between asset prices, monetary policy, and aggregate fluctuations in the U.S. during the Volcker–Greenspan period. Results from a simple structural vector autoregression indicate that monetary policy reacts directly to the term spread and indirectly to stock prices and house prices via output and inflation, that there is an asymmetry in the interactions between asset prices and aggregate activity, and that asset prices exhibit positive comovement.

The Implied Consumer Euler Rate: What Role for Financial Frictions?

There is increasingly dissatisfaction with the traditional New Keynesian IS curve linking the interest rate to consumption. The central bank's interest rate target is found to differ significantly from the implied consumer Euler rate thus impairing the working of the (traditional) monetary transmission mechanism. We look for other determinants of the IS curve that help overcoming its weakness in matching aggregate data. We find a non-negligible role for financial frictions in general, and for the external finance premium in particular, analyzing US data for the Greenspan period. This supports the recent view (see Curdia and Woodford (2010)) that calls central banks to target credit spreads. (JEL codes: E21; E52) Copyright The Author 2012. Published by Oxford University Press on behalf of Ifo Institute, Munich. All rights reserved. For permissions, please email: journals.permissions@oup.com, Oxford University Press.

Revealing the preferences of the US Federal Reserve

AbstractWe use Bayesian methods to estimate changes in US post‐war monetary policy in the Smets and Wouters model. We perform the estimations by allowing for a break in monetary policy at the time of Volcker's appointment as chairman. This enables us to capture changes in the monetary policy regime introduced by Volcker during the Volcker–Greenspan period. We find support for the assumption that monetary policy in the Volcker–Greenspan period performed optimally under commitment. Our estimation strategy allows us to estimate the preferences of the US Federal Reserve in the Volcker–Greenspan period, where the main objective of policy appears to be inflation, followed by interest rate stabilization, output growth and interest rate smoothing. We find that the Great Moderation of output growth is explained by a combination of two factors: the decrease in the volatility of the structural shocks and the improved monetary policy conduct. Inflation Stabilization, however, is mainly due to the change in monetary policy that took place at the beginning of Volcker's mandate. Copyright © 2010 John Wiley & Sons, Ltd.

Metas de inflação: lições da era Greenspan

Inflation targets: lessons from the Greenspan era. This paper approaches the experience of monetary policy in the Greenspan period and suggests what lessons could be learnt. The adoption of inflation targeting would denote a step backward in the policymaking process in the USA, for, since the 1980s, a distinctive feature is flexibility of response to adjust to unexpected events and changing environments. The Fed was able to exercise an informed judgement in critical situations and this opens the case for the importance of not restraining policymakers’ actions through the adoption of tight rules. Furthermore, that the various experiences with inflation targeting are indisputably huge successes, and that this framework represents the state of the art (therefore nothing else can alternatively be done), remains to be seen.

How robust is the Fed reaction function to changes in the output-gap specification?

Using alternative measures of the output gap, we estimate a forward-looking monetary policy reaction function, similar to those estimated by Clarida et al. (1998, 2000), for Greenspan's period as a chairman of the Board of Governors of the US Federal Reserve System. We are able to show that the reaction function that considers an output gap based on the industrial production index instead of the unemployment rate better captures the behaviour of the Federal Reserve during Greenspan's period.

What Accounts for the Changes in U.S. Fiscal Policy Transmission?

Using vector autoregressions on U.S. time series for 1957–79 and 1983–2004, we find government spending shocks to have stronger effects on output, consumption, and wages in the earlier period. We try to account for this observation within a DSGE model featuring price rigidities and limited asset market participation. Specifically, we estimate the structural parameters of the model for both periods by matching impulse responses. Model‐based counterfactual experiments suggest that most of the changes in fiscal policy transmission are accounted for by increased asset market participation and the more active monetary policy of the Volcker–Greenspan period.

Revealing the Preferences of the US Federal Reserve

We use Bayesian methods to estimate the preferences of the US Federal Reserve by assuming that monetary policy is performed optimally under commitment since the mid-sixties. For this purpose, we distinguish between three subperiods, i.e. the pre-Volcker, the Volcker-Greenspan and the Greenspan period. The US economy is described by the Smets and Wouters (2007) model. We find that there has been a switch in the monetary policy regime since Volcker, with a focus on output growth instead of the output gap level as a target variable. We further show that both interest rate variability and interest rate smoothing are significant target variables, though less important than the inflation and output growth targets. We find that the Great Moderation of output growth is largely explained by the decrease in the volatility of the structural shocks. The Inflation Stabilization, however, is mainly due to the change in monetary policy that took place at the start of Volcker's mandate. During the Greenspan period, the optimal Taylor rule appears to be equally robust to parameter uncertainty as the unrestricted optimal commitment rule.

Monetary policy and U.S. long-term interest rates: How close are the linkages?

The effect of monetary policy on long-term interest rates has been a question of interest in recent years. A number of papers, relying on single-equation estimation techniques, have presented evidence that long-term interest rates exhibit sizable and significant responses to unanticipated changes in the Federal Reserve's target federal funds rate. This paper examines these findings in light of conflicting findings from VAR studies, which indicate negligible effects of innovations in the federal funds rate on long-term rates. To address the issue we use a single-equation approach where unanticipated changes in the federal funds rate are measured as residuals from policy reaction functions. We also estimate VAR specifications, which incorporate information about the timing of changes in the Federal Reserve's target federal funds rate. Our single-equation estimates provide evidence of strong responses of long rates to unanticipated changes in the federal funds rate both for the Greenspan period and for a longer period back to the mid-1960s. It seems likely that estimated VARs for the post-1987 years are less successful in isolating monetary policy surprises than was the case for earlier years.

Estimating the Federal Reserve's implicit inflation target: A state space approach

Existing estimates of the Federal Reserve's implicit inflation target typically rely on the assumption that it is constant for the duration of the period of analysis. This paper relaxes this assumption and estimates the implicit inflation target using a time-varying parameter model and the Kalman filter. In applying this method to the Volcker–Greenspan period, it finds significant time variation in the implicit target that is consistent with hypotheses about ‘opportunistic disinflation’ and the recent ‘deflation scare’.

Asymmetric interest rate smoothing: The Fed approach

The central bank could have asymmetric preferences for interest rate smoothing depending on the direction of the monetary policy's stance. An empirical analysis for the Volcker–Greenspan period strongly supports this possibility for the Federal Reserve.

Borrowed Reserves, Fed Funds Rate Targets, and the Term Structure

When examined for the period 1985-1992 as a whole, the impact of changes in th e targeted Fed funds rate on U.S. treasury bill rates has been weaker than during previous periods. The period, however, should be viewed as three separate regimes. First, I show significan t differences between the Greenspan and Volcker eras arising from management style. Volcker emitted ambiguous signals to the market, which induced heterogenous expectations . Greenspan's market leadership forged more homogeneous expectations allowing treasury rate responses prior to the target change to be attributed to market anticipations. Further, I fin d strong annual seasonality in borrowed reserves targets, corresponding to an agricultural cycle. It suggests the Fed no l onger defends a target for borrowed reserves and instead allows them to follow the cycle. Subsequently, the Fed funds rate adheres more closely to a target rate and Treasury rates react similarly to an ea rlier direct Fed funds target regime. Thus, I conclude that as of late 1989, the Fed again directly targets the Fed funds rate. Target rate changes induce starkly different reactions by treasury rates of variou s maturities over the three regimes. Applied to the term structure, I find that the average monthly interest rates implied by the expectat ions theory is consistent with the pattern of actual treasury rate reactions. I compare implied monthly rate reac tions after a policy shock between direct Fed funds rate regimes of the latter Greenspan period and the 1975-1979 Fed. I find that after a policy easing, the market expects the monthly rate to remain at a lower level throughout a horzion of at least 20 years. This is consistent with expectations of a Fed that is able an d willing to contain inflation: although easing, the pub lic has confidence it will not inflate over the forseeable future.

Estimates of US monetary policy rules with allowance for changes in the output gap

This article estimates a reduced form Taylor rule for the Pre-Volcker and Volcker–Greenspan periods. A novelty is that it follows a suggestion of Walsh and includes changes in the output gap as an explanatory variable. Either this variable or an interaction term between inflation and changes in the output gap are highly significant in both periods. The response to inflation and the interaction term are higher in the Volcker–Greenspan period of office.

Technology shocks and monetary policy: assessing the Fed's performance

The purpose of the present paper is twofold. First, we characterize the Fed's systematic response to technology shocks and its implications for U.S. output, hours and inflation. Second, we evaluate the extent to which those responses can be accounted for by a simple monetary policy rule (including the optimal one) in the context of a standard business cycle model with sticky prices. Our main results can be described as follows: First, we detect significant differences across periods in the response of the economy (as well as the Fed's) to a technology shock. Second, the Fed's response to a technology shock in the Volcker–Greenspan period is consistent with an optimal monetary policy rule. Third, in the Pre-Volcker period the Fed's policy tended to overstabilize output at the cost of generating excessive inflation volatility. Our evidence reinforces recent results in the literature suggesting an improvement in the Fed's performance.

Did the Fed Surprise the Markets in 2001? A Case Study for Vars with Sign Restrictions

In 2001, the Fed has lowered interest rates in a series of cuts, starting from 6.5 per cent at the end of 2000 to 2.0 per cent by early November. This paper asks whether the Federal Reserve Bank has been surprising the markets, taking as given the about the effect of monetary policy shocks. New econometric techniques turn out to be particularly suitable for answering this question: this paper can be viewed as a showcase and case study for their application. In order to concentrate on the Greenspan period, a vector autoregression is fitted to US data, starting in 1986 and ending in September 2001. Monetary policy shocks are identified, using the new sign restriction methodology of Uhlig (1999), imposing the conventional view that contractionary policy shocks lead to a rise in interest rates and declines in nonborrowed reserves, prices and output. We find that neither the Fed policy choices in 2001 nor those of 2000 were surprising. We provide a method to explain these interest rate movements by decomposing them into their sources. Finally, we argue that constant-interest- rate projections like those popular at many central banks are of limited informational value, can be highly misleading, and should instead be replaced by on-the-equilibrium-path projections.