TY - JOUR
T1 - Estimation of a forward-looking monetary policy rule
T2 - A time-varying parameter model using ex post data
AU - Kim, Chang Jin
AU - Nelson, Charles R.
N1 - 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.
PY - 2006/11
Y1 - 2006/11
N2 - 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.
AB - 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.
KW - Endogeneity
KW - Forward-looking monetary policy
KW - Heteroscedasticity
KW - Nonlinearity
KW - Time-varying parameter model
UR - http://www.scopus.com/inward/record.url?scp=33750825784&partnerID=8YFLogxK
U2 - 10.1016/j.jmoneco.2005.10.017
DO - 10.1016/j.jmoneco.2005.10.017
M3 - Article
AN - SCOPUS:33750825784
SN - 0304-3932
VL - 53
SP - 1949
EP - 1966
JO - Journal of Monetary Economics
JF - Journal of Monetary Economics
IS - 8
ER -