Paper #350

Title:

Monetary policy rules and macroeconomic stability: Evidence and some theory

Authors:

Richard Clarida, Jordi Galí and Mark Gertler

Date:

March 1997 (Revised: May 1999)

Abstract:

We estimate a forward-looking monetary policy reaction function for the postwar United States economy, before and after Volcker's appointment as Fed Chairman in 1979. Our results point to substantial differences in the estimated rule across periods. In particular, interest rate policy in the Volcker-Greenspan period appears to have been much more sensitive to changes in expected inflation than in the pre-Volcker period. We then compare some of the implications of the estimated rules for the equilibrium properties of inflation and output, using a simple macroeconomic model, and show that the Volcker-Greenspan rule is stabilizing.

Keywords:

Monetary policy rules, business cycles, Taylor rules, sunspot fluctuations

JEL codes:

E32, E52

Area of Research:

Macroeconomics and International Economics

Published in:

Quarterly Journal of Economics, vol. CXV, issue 1, 147-180, 2000

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