Quantifying the Federal Reserve’s Objectives Using a Structural Vector Autoregressive Model
33 Pages Posted: 13 Feb 2020 Last revised: 15 Mar 2021
Date Written: March 5, 2021
The Federal Reserve’s (Fed’s) objective, namely, its dovish stance, is often blamed for the so-called Great Inflation. A popular proxy for the former is constructed using the inflation coefficients in estimated Taylor rules. However, for a welfare-optimizing central bank, the estimated Taylor coefficients are not sufficient for inferring its underlying preference. We quantify Fed’s objective—the targeting rule—relying on a conditional estimator (Galí and Gambetti 2018) that is free of the classical simultaneity problem. We discover that Fed’s targeting rule remained stable during the pre- and post-Volcker periods—the opposite of what is implied through a Taylor rule estimation.
Keywords: Targeting Rule, Central Bank Preference, Structural Vector Autoregressive (SVAR) Model, Sign Restrictions, Great Inflation, Great Moderation
JEL Classification: E31, E32, E52, E58, E65
Suggested Citation: Suggested Citation