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Real time data, regime shifts, and a simple but effective estimated Fed policy rule, 1969-2009

Smant, David / D.J.C. (2011): Real time data, regime shifts, and a simple but effective estimated Fed policy rule, 1969-2009.

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Abstract

This paper re-examines the use of estimated Taylor rule equations as a standard long run description of Federal Reserve policy. The empirical results suggest that until 1979 Fed policy changed the real funds rate in response to the output gap, with no response to an inflation target. During the Volcker period the policy rule kept the real funds rate at a high but constant level, with no response to the output gap. These regime shifts affect the descriptive performance of the basic Taylor rule equation and any further analysis that is based on it. Taking into account the regime shifts and real time data, a simple but effective federal funds rate equation can be estimated using only inflation and the output gap.

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