Monetary Policy Reestimated
63 Pages Posted: 16 Jun 2021 Last revised: 3 Mar 2023
Date Written: June 14, 2021
We propose to use a few assumptions on an abstract dynamic stochastic general equilibrium (DSGE) model to identify the monetary policy rule and shock. Using the estimated monetary policy rule, we argue that the Federal Reserve implemented the Friedman policy of steady money growth before the Great Moderation. During the Great Moderation, the monetary policy followed the Taylor rule with interest rate smoothing, where the type of smoothing is more general than that discussed in the literature. The estimated impulse response functions to the monetary policy shock are large and significant, even on the Great Moderation data.
Keywords: identification, monetary policy, Great Moderation, Great Inflation, Friedman policy, Taylor rule, interest rate smoothing, housing starts
JEL Classification: E52, C30, N1, R31
Suggested Citation: Suggested Citation