Testing the Opportunistic Approach to Monetary Policy

Martin, Chris and Milas, Costas (2006): Testing the Opportunistic Approach to Monetary Policy.

Abstract

The Opportunistic Approach to Monetary Policy is an influential but untested model of optimal monetary policy. We provide the first tests of the model, using US data from 1983Q1-2004Q1. Our results support the Opportunistic Approach. We find that policymakers respond to the gap between inflation and an intermediate target that reflects the recent history of inflation. We find that there is no response of interest rates to inflation when inflation is within 1% of the intermediate target but a strong response when inflation is further from the intermediate target.

• Item Type: MPRA Paper
• Institution: Keele University
• Language: English
• Subjects: E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy

References

Aksoy, Y., A. Orphanides, D. Small, V. Weiland and D. Wilcox (2005). A quantitative exploration of the Opportunistic Approach to disinflation, forthcoming, Journal of Monetary Economics.

Bernanke, B. (2003). Constrained discretion and monetary policy, speech at New York University.

Bernanke, B. and F. Mishkin (1997). Inflation targeting: a new framework for monetary policy?, Journal of Economic Perspectives, 11, pp 97-116.

Clarida, R.J., M. Gali and M. Gertler (2000). Monetary policy rules and macroeconomic stability: evidence and some theory, Quarterly Journal of Economics, 115, pp 147–180.

Dahl, C.M. and G. González-Rivera (2003). Testing for neglected nonlinearity in regression models based on the theory of random fields, Journal of Econometrics, 114, pp 141-164.

Eitrheim, Ø. and T. Teräsvirta (1996). Testing the adequacy of smooth transition autoregressive models, Journal of Econometrics, 74, pp 59-75.

Garratt, A., K. Lee, E. Mise and K. Shields (2005). Real time representations of the output gap. Paper presented at the CIRANO and Bank of Canada’s Workshop on ‘Macroeconomic Forecasting, Analysis and Policy with Data Revisions’, 14 October 2005.

Gerberding, C., Seitz F. and A. Worms (2005). How the Bundesbank really conducted monetary policy, North American Journal of Economics and Finance, 16, pp 277-292.

Gerdesmeier, D. and B. Roffia (2005). The relevance of real-time data in estimating reaction functions for the euro area, North American Journal of Economics and Finance, 16, pp 293-307.

Granger, C.W.J. and T. Teräsvirta (1993). Modelling Nonlinear Economic Relationships. Oxford: Oxford University Press.

Hamilton, J.D. (2001). A parametric approach to flexible nonlinear inference, Econometrica, 69, pp 537-573.

Hansen, L.P. (1982). Large sample properties of generalized method of moments estimators, Econometrica, 82, pp 1029–1054.

Hodrick, R.J. and E.C. Prescott (1997). Postwar U.S. business cycles: An empirical investigation, Journal of Money, Credit, and Banking, 29, pp 1–16.

Judd, J. and G. Rudebusch (1998). Taylor’s rule and the Fed: 1970-97, Federal Reserve Bank of San Francisco Economic Review, 3, pp 3-16.

Lin, C-F.J. and T. Teräsvirta (1994). Testing the constancy of regression parameters against continuous structural change, Journal of Econometrics, 62, pp 211-228.

Minford, P. and N. Srinivasan (2006). Opportunistic Monetary Policy: an Alternative Rationalization, Journal of Economics and Business (to appear).

Mise, E., T-H. Kim and P. Newbold (2005a). On the sub-optimality of the Hodrick-Prescott filter, Journal of Macroeconomics, 27, pp 53-67.

Mise, E., T-H. Kim and P. Newbold (2005b). Correction of the distortionary end-effect of the Hodrick-Prescott filter: Application”, mimeo, downloadable from: http://www.le.ac.uk/economics/staff/em92.html

Orphanides, A. and V. Wieland (2000). Inflation zone targeting, European Economic Review, 44, pp 1351–1387.

Orphanides, A. and D. Wilcox (2002). The Opportunistic Approach to Disinflation, International Finance, 5, pp 47-71.

Rudebusch, G. (1998). Do measures of monetary policy in a VAR make sense?, International Economic Review, 39, pp 907–931.

Svensson, L.E.O (2003). What Is wrong with Taylor rules? Using judgment in monetary policy through targeting rules, Journal of Economic Literature, 41, 426-477.

Taylor, J. (1993). Discretion versus policy rules in practice, Carnegie-Rochester Conference Series on Public Policy, 39, pp 195-214.

Teräsvirta, T. (1994). Specification, estimation, and evaluation of smooth transition autoregressive models, Journal of the American Statistical Association, 89, pp 208–218.

van Dijk, D., T. Teräsvirta, and P.H. Franses (2002). Smooth transition autoregressive models – a survey of recent developments, Econometric Reviews, 21, pp 1-47.