The Fed and the New Economy

All Fluctuations Are Not Created Equal: The Differential Roles of Transitory versus Persistent Changes in Driving Historical Monetary Policy

“…Lakdawala (2016) also finds that FOMC preferences for fighting inflation, while varying over time, drastically rose around the appointment of Volcker. 10 We view our results as complementary to those of Cogley, Primiceri and Sargent (2010), who argue that superior policy outcomes following Volcker resulted mainly from superior inflation anchoring, as we might suggest that more aggressive responses to inflation (and the associated willingness to accept concomitantly higher unemployment) could lead to such superior anchoring.…”

“…Our findings are striking, but quite sensible upon reflection. First, our estimates indicate that 4 We note in passing that several studies of monetary policy rules, such as that of Ball and Tchaidze (2002), do not use an unemployment gap specification. This is consistent with an assumption that the natural rate is constant.…”

“…The "Period" column in Table 3 is the number of observations over which the sine or cosine used in the corresponding row of the  matrix completes one full cycle. This is ten observations for rows two and three of this  matrix, 10 2 = 5 observations for rows four and five, 10 3 = 3 1 3 observations for rows six and seven, 10 4 = 2 1 2 observations for rows eight and nine, and 10 5 = 2 observations for row ten. 43 In the most common convention, the frequency is defined as  2 times the inverse of the cycle length (period) of the corresponding sine or cosine for that row of the  matrix, in which case the frequencies run from zero (for row one) to  for row ten.…”

Coping With Uncertainty: Historical and Real‐time Estimates of the Natural Unemployment Rate and the Uk Monetary Policy*

“…Starting with Taylor (1993) a substantial literature argues that the US monetary policy of the past 20 years can be well explained by a simple interest rate reaction function where interest rates respond to deviations of inflation from its target as well as to aggregate slack. Ball and Tchaidze (2002) and Blinder and Reis (2005), among others, show that a simple Taylor rule based on a time‐varying natural rate can track closely the US monetary policy of the 1990s, suggesting that the policy makers' ‘forbearance’ in face of falling unemployment and a booming economy reflected simply a real‐time awareness of the steady decline of the natural rate of unemployment. To the extent that ‘forbearance’ in face of falling unemployment has been a key component of the remarkable economic record of the USA during the 1990s, the American Federal Reserve's early recognition of the steady decline of the natural rate should claim part of the credit 16…”

“…The actual interest rate might deviate from the one prescribed by the above Taylor rule for reasons other than real-time uncertainty about the true state of the economy, e.g. instability in the slope 16 Ball and Tchaidze (2002) and Blinder and Reis (2005) argue that the ability of the American Federal Reserve to recognize changes in the natural rate of unemployment was due to an early appreciation of the emerging new economy and the ensuing acceleration of productivity growth. For the potential effect of productivity growth on the natural rate of unemployment see Ball and Moffitt (2001) and Ball and Mankiw (2003).…”