Can We Identify the Fed's Preferences?
31 Pages Posted: 10 Feb 2017 Last revised: 3 Dec 2017
Date Written: December 2, 2017
Using US data, we estimate optimal policy with a probability below one that the Fed reneges on its commitment ("limited credibility") versus discretionary policy where the Fed reneges on its commitment at all periods with a probability equal to one ("zero credibility"). The transmission mechanism is the new-Keynesian Phillips curve with auto-correlated cost-push shock. It includes the labor cost channel or the working capital channel. Discretion with zero credibility of the Fed is rejected. The working capital channel fits the data before Volcker's mandate. The labor cost channel fits the data since Volcker's mandate.
Keywords: Ramsey Optimal Policy, Quasi-commitment, Zero-Credibility Policy, Identification, Central Bank Preferences, New-Keynesian Phillips Curve, Working capital channel
JEL Classification: C61, C62, E43, E44, E47, E52, E58
Suggested Citation: Suggested Citation