Estimation of a forward-looking monetary policy rule: A time-varying parameter model using ex post data

Chang Jin Kim, Charles R. Nelson

Research output: Contribution to journalArticlepeer-review

105 Citations (Scopus)


In this paper, we consider estimation of a time-varying parameter model for a forward-looking monetary policy rule, by employing ex post data. A Heckman-type (1976. The common structure of statistical models of truncation, sample selection, and limited dependent variables and a simple estimator for such models. Annals of Economic and Social Measurement 5, 475-492) two-step procedure is employed in order to deal with endogeneity in the regressors. This allows us to econometrically take into account changing degrees of uncertainty associated with the Fed's forecasts of future inflation and GDP gap when estimating the model. Even though such uncertainty does not enter the model directly, we achieve efficiency in estimation by employing the standardized prediction errors for inflation and GDP gap as bias correction terms in the second-step regression. We note that no other empirical literature on monetary policy deals with this important issue. Our empirical results also reveal new aspects not found in the literature previously. That is, the history of the Fed's conduct of monetary policy since the early 1970s can in general be divided into three subperiods: the 1970s, the 1980s, and the 1990s. The conventional division of the sample into pre-Volcker and Volcker-Greenspan periods could mislead the empirical assessment of monetary policy.

Original languageEnglish
Pages (from-to)1949-1966
Number of pages18
JournalJournal of Monetary Economics
Issue number8
Publication statusPublished - 2006 Nov

Bibliographical note

Funding Information:
We appreciate Yunmi Kim for her excellent research assistance. We would also like to thank participants at presentations at Ohio State University, University of California-San Diego, Indiana University, Federal Reserve Bank of St. Louis, Federal Reserve Bank of Atlanta for useful discussions and comments. Kim acknowledges support from Korea Research Foundation Grant (KRF-2004-B00059) and Nelson acknowledges support from the Ford and Louisa Van Voorhis endowment.


  • Endogeneity
  • Forward-looking monetary policy
  • Heteroscedasticity
  • Nonlinearity
  • Time-varying parameter model

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics


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