Real Time Changes in Monetary Policy

38 Pages Posted: 8 May 2009

See all articles by Marcelle Chauvet

Marcelle Chauvet

University of California Riverside

Heather L. R. Tierney

Purdue University Fort Wayne

Date Written: April 1, 2009


This paper investigates potential changes in monetary policy over the last decades using a nonparametric vector autoregression model. In the proposed model, the conditional mean and variance are time-dependent and estimated using a nonparametric local linear method, which allows for different forms of nonlinearity, conditional heteroskedasticity, and non-normality. Our results suggest that there have been gradual and abrupt changes in the variances of shocks, in the monetary transmission mechanism, and in the Fed's reaction function. The response of output was strongest during Volcker's disinflationary period and has since been slowly decreasing over time. There have been some abrupt changes in the response of inflation, especially in the early 1980s, but we can not conclude that it is weaker now than in previous periods. Finally, we find significant evidence that policy was passive during some parts of Burn's period, and active during Volcker's disinflationary period and Greenspan' period. However, we find that the uncovered behavior of the parameters is more complex than general conclusions suggest, since they display considerable nonlinearities over time. A particular appeal of the recursive estimation of the proposed VAR-ARCH is the detection of discrete local deviations as well as more gradual ones, without smoothing the timing or magnitude of the changes.

Keywords: Monetary Policy, Taylor Rule, Nonlinearity, Structural Vector Autoregression, Autoregressive Conditional Heteroskedasticity, Local Linear Estimation

JEL Classification: E40, E52, E58

Suggested Citation

Chauvet, Marcelle and Tierney, Heather L.R., Real Time Changes in Monetary Policy (April 1, 2009). Available at SSRN: or

Marcelle Chauvet (Contact Author)

University of California Riverside ( email )

900 University Avenue
4136 Sproul Hall
Riverside, CA 92521
United States
(951) 827-1587 (Phone)

HOME PAGE: http://

Heather L.R. Tierney

Purdue University Fort Wayne ( email )

Department of Economics
Doermer School of Business
Fort Wayne, IN 46805
United States
260-481-6488 (Phone)

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