What if the Fed had been an inflation nutter?

Abstract

A structural rational expectations model of US monetary policy is used to make a counterfactual experiment of a strongly inflation averse Federal Reserve Bank. Results for US interest rates, output, and inflation over 1965–1999 are discussed.

Notes

The estimation results are the following: in the IS curve (α₁, α₂, α _r , Std(ϵ _yt )) = (1.39,−0.50,−0.55,0.84); in the loss function (q _y , q _i ) = (0.82, 0.35); in the price equations (θ₀, θ₁, γ,Std(ϵ_pt)) = (0.62,0.29,0.0019,0.19); and the T-bill Std error is 1.41.