Policy Regime Changes, Judgment and Taylor Rules in the Greenspan Era

19 Pages Posted: 24 Jan 2011

See all articles by Cinzia Alcidi

Cinzia Alcidi

CEPS; Graduate Institute of International and Development Studies (IHEID)

Alessandro Flamini

Graduate Institute of International and Development Studies (IHEID)

Andrea Fracasso

University of Trento

Date Written: February 24, 2009

Abstract

This paper investigates policy deviations from linear Taylor rules motivated by the risk management approach followed by the Fed during the Greenspan era. We estimate a nonlinear monetary policy rule via a logistic smoothing transition regression model where policy-makers' judgment, proxied by economically meaningful variables, drives the transition across policy regimes. We find that ignoring judgment-induced nonlinearities while estimating Taylor rules has remarkable costs in terms of fit: above 250 bps in 10 quarters. Although linear Taylor rules describe well the broad contours of monetary policy, they fail to detect relevant policy decisions driven by policy-makers' judgment.

Suggested Citation

Alcidi, Cinzia and Flamini, Alessandro and Fracasso, Andrea, Policy Regime Changes, Judgment and Taylor Rules in the Greenspan Era (February 24, 2009). Economica, Vol. 78, Issue 309, pp. 89-107, 2009, Available at SSRN: https://ssrn.com/abstract=1746618 or http://dx.doi.org/10.1111/j.1468-0335.2009.00777.x

Cinzia Alcidi (Contact Author)

CEPS ( email )

1 Place du Congres
Brussels, 1000
Belgium

Graduate Institute of International and Development Studies (IHEID) ( email )

132, Rue de Lausanne
Geneva, 1211
Switzerland

Alessandro Flamini

Graduate Institute of International and Development Studies (IHEID) ( email )

PO Box 136
Geneva, CH-1211
Switzerland

Andrea Fracasso

University of Trento ( email )

via Inama 5
I-38122 Trento, Trento 38122
Italy

HOME PAGE: http://andrea.fracasso.googlepages.com/andreafracassopersonalhomepage

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
3
Abstract Views
425
PlumX Metrics