Can We Identify the Fed's Preferences?

31 Pages Posted: 10 Feb 2017 Last revised: 3 Dec 2017

See all articles by Jean-Bernard Chatelain

Jean-Bernard Chatelain

Paris School of Economics, Université Paris 1 Panthéon Sorbonne

Kirsten Ralf

Ecole Supérieure du Commerce Extérieur (ESCE)

Date Written: December 2, 2017

Abstract

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

Chatelain, Jean-Bernard and Ralf, Kirsten, Can We Identify the Fed's Preferences? (December 2, 2017). Available at SSRN: https://ssrn.com/abstract=2914592 or http://dx.doi.org/10.2139/ssrn.2914592

Jean-Bernard Chatelain (Contact Author)

Paris School of Economics, Université Paris 1 Panthéon Sorbonne ( email )

48 Boulevard Jourdan
Paris, 75014 75014
France

HOME PAGE: http://www.parisschoolofeconomics.eu/fr/chatelain-jean-bernard/

Kirsten Ralf

Ecole Supérieure du Commerce Extérieur (ESCE) ( email )

10 Rue Sextius Michel
Paris, 75015
France

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