Munich Personal RePEc Archive

Monetary Policy Rules and Macroeconomic Stability

Jayawickrema, Vishuddhi (2019): Monetary Policy Rules and Macroeconomic Stability.

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This paper attempts to characterize the monetary policy regimes in the United States and analyze their effects on macroeconomic stability. It does so by estimating Taylor-type forward-looking monetary policy reaction functions for the pre- and post-1979 periods, and simulating the resultant coefficients in a basic New Keynesian business cycle model. The feedback coefficient on inflation in the estimated policy reaction function is found to be less than unity for the 1960-1979 period, suggesting an accommodative monetary policy stance of the Federal Reserve. However, for the 1979-2017 period, the feedback coefficient on inflation is estimated to be substantially greater than unity, implying that the Federal Reserve adopted a proactive policy stance towards controlling inflation. It is also found that in recent times, the Federal reserve has shifted its focus from short one period ahead inflation targets to longer target horizons such as one year ahead inflation targets. Meanwhile, the model simulations show that the economy exhibits greater stability under a model with post-1979 calibration than a model with a combination of pre-1979 parameters and `sunspot' shocks.

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