Bad luck, bad policy, and learning? A Markov-switching approach to understanding postwar U.S. macroeconomic dynamics

Best, Gabriela; Hur, Joonyoung

doi:10.1016/j.euroecorev.2019.06.006

Cited by 7 publications

(6 citation statements)

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“…One particularly important development is the effort to incorporate the possibility of recurrent regime shifts (e.g., changes in monetary policy) into the model specification. Due to the substantial improvement in model fit, a multitude of empirical studies have proposed to estimate the state space representation of regime-switching DSGE models using likelihood-based econometric approaches [Schorfheide (2005), Liu et al (2011), Bi andTraum (2012, 2014), Bianchi (2013), Davig and Doh (2014), Bianchi and Ilut (2017), Bianchi and Melosi (2017), Best and Hur (2019), among others].…”

Section: Dsge Applicationmentioning

confidence: 99%

Origins of monetary policy shifts: A New approach to regime switching in DSGE models

Chang

Maih

Tan

2021

Journal of Economic Dynamics and Control

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We examine monetary policy shifts by taking a new approach to regime switching in a small scale monetary DSGE model with threshold-type switching in the monetary policy rule. The policy response to inflation is allowed to switch endogenously between two regimes, hawkish and dovish, depending on whether a latent regime factor crosses a threshold level. Endogeneity stems from the historical impacts of structural shocks driving the economy on the regime factor. We quantify the endogenous feedback from each structural shock to the regime factor to understand the sources of the observed policy shifts. This new channel sheds new light on the interaction between policy changes and measured economic behavior. We develop a computationally efficient filtering algorithm for state-space models with time-varying transition probabilities that handles classical regression models as a special case. We apply this filter to estimate our DSGE model using the U.S. data and find strong evidence of endogeneity in the monetary policy shifts.

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Section: Dsge Applicationmentioning

confidence: 99%

Origins of monetary policy shifts: A New approach to regime switching in DSGE models

Chang

Maih

Tan

2021

Journal of Economic Dynamics and Control

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“…2 Meanwhile, numerous studies have reported that monetary policy rules have varied over time. Limited examples of such works are Clarida et al (2000), Dolado et al (2004), Surico (2007Surico ( , 2008, Bae et al (2012), Bianchi (2013), Fiodendji (2013), and Best and Hur (2019). Among them, studies such as Dolado et al (2004) and Surico (2007Surico ( , 2008 estimate US monetary policy reaction functions based on nonquadratic loss functions and suggest that the Fed's preferences showed a shift between the pre-Volcker and Volcker-Greenspan eras.…”

Section: Literature Reviewmentioning

confidence: 99%

“…2 Best and Hur (2019) examine the contributions of these three sources in understanding the time variation of US monetary policy between 1960 and 2007.…”

Section: Literature Reviewmentioning

confidence: 99%

“…Bae et al (2012) argue that the evolution of the monetary policy rule of the Fed approximately coincides with the terms of its various chairpersons. Bianchi (2013) and Best and Hur (2019) contend that a change in the monetary policy rule is one of the important factors in understanding the macroeconomic dynamics of the United States. Debortoli and Nunes (2014) demonstrate that changes in the parameters of the monetary policy rule are not necessarily linked to changes in the Fed's preference.…”

Section: An Economic Model With Time-varying Parametersmentioning

confidence: 99%

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Tracking a central banker's preference: A nonparametric regression approach

Park

2021

Bulletin of Econ Res

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We examine how the Fed's preference influences the behavior of inflation rate and unemployment rate using US data over the period of 1960-2017. After showing instability in a constant-coefficient regression, we run a nonparametric regression, and find that the Fed's preference parameters have moved, implying that its preference can be represented by the asymmetric preference model putting more weights on high unemployment rate approximately before the era of Volcker's chairmanship and by the inflation targeting model during the 1980s and 1990s. The Fed's preferences again seem concerned about higher unemployment after the Global Financial Crisis.

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“…1 The assumption in the standard New Keynesian model is that the interest rate rule followed by the central bank does not change across the business cycle. Theoretical studies such as Barthélemy and Marx (2017), Best and Hur (2017), Bianchi (2013), Chang and Kwak (2017), Davig and Doh (2014), Foerster (2016), Lhuissier and Zabelina (2015), Liu et al (2009), Liu et al (2011), Schorfheide (2005), and others now consider switches in monetary policy and their macroeconomic implications in Dynamic Stochastic General Equilibrium (DSGE) frameworks. Notably, Choi and Foerster (2016) find that monetary policy rules with switching can provide welfare gains relative to constant rules.…”

Section: Introductionmentioning

confidence: 99%

Timing and Signals of Monetary Regime Switching

Soques

2020

Macroecon. Dynam.

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This study investigates if the reaction function of the Federal Reserve switches between two distinct policy rules. Using a time-varying transition probability framework, we also determine if forward-looking macroeconomic or financial covariates signal an impending monetary regime switch. We find that US monetary policy is best described by a Markov-switching model with two regime processes, one of which controls for heteroskedasticity in the shocks to the policy rule. We find that the Fed switches between an aggressive regime with a relatively high weight on inflation and a dovish regime that is less responsive to inflationary pressures. We find that an increase in private forecasters’ expectations of an impending recession signals a switch from the more aggressive policy regime to the less aggressive regime. A recovery in equity returns signals a return back to the more aggressive regime.

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Bad luck, bad policy, and learning? A Markov-switching approach to understanding postwar U.S. macroeconomic dynamics

Cited by 7 publications

References 40 publications

Origins of monetary policy shifts: A New approach to regime switching in DSGE models

Origins of monetary policy shifts: A New approach to regime switching in DSGE models

Tracking a central banker's preference: A nonparametric regression approach

Timing and Signals of Monetary Regime Switching

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