Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory

38 Pages Posted: 21 Jul 2000 Last revised: 8 Oct 2010

See all articles by Richard Clarida

Richard Clarida

Columbia University - Graduate School of Arts and Sciences - Department of Eco; National Bureau of Economic Research (NBER)

Jordi Galí

Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI); Massachusetts Institute of Technology (MIT) - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Mark Gertler

New York University - Leonard N. Stern School of Business - Department of Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: March 1998

Abstract

We estimate a forward-looking monetary policy reaction function for the postwar US economy, pre- and post-October 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 equilibrium properties of inflation and output, using a simple macroeconomic model. The pre-Volcker rule is shown to be consistent with the possibility of persistent, self-fulfilling fluctuations in inflation and output. In contrast, the Volcker-Greenspan rule is stabilizing.

Suggested Citation

Clarida, Richard H. and Gali, Jordi and Gertler, Mark, Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory (March 1998). NBER Working Paper No. w6442. Available at SSRN: https://ssrn.com/abstract=226188

Richard H. Clarida (Contact Author)

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Jordi Gali

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Mark Gertler

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