Title

Were There Regime Switches in U.S. Monetary Policy?

Author(s)

Christopher A. Sims Christopher Sims (Princeton University and NBER)

Tao Zha Tao Zha (Federal Reserve Bank of Atlanta)

Abstract

A multivariate model, identifying monetary policy and allowing for simultaneity and regime switching in coefficients and variances, is confronted with US data since 1959. The best fit is with a version that allows time variation in structural disturbance variances only. Among versions that allow for changes in equation coefficients also, the best fit is for a one that allows coefficients to change only in the monetary policy rule. That version allows switching among three main regimes and one rarely and briefly occurring regime. The three main regimes correspond roughly to periods when most observers believe that monetary policy actually differed, but the differences among regimes are not large enough to account for the rise, then decline, in inflation of the 1970s and 1980s. In versions that insist on changes in the policy rule, the estimates imply monetary targeting was central in the early 1980s, but also important sporadically in the 1970s.

Creation Date

2005-05

Section URL ID

CEPS

Paper Number

110

URL

https://gceps.princeton.edu/wp-content/uploads/2017/01/110sims.pdf

File Function

Jel

E52; E47; C53

Keyword(s)

Counterfactuals; Lucas critique; policy rule; monetary targeting; simultaneity; volatility; model comparison, United States

Suppress

false

Series

3