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Can We Identify the Fed's Preferences?

Abstract : Shifting from Ramsey optimal policy to time-consistent policy or optimal simple rule corresponds to a saddle-node bifurcation of the dynamic system of the economy. A pre-test of Ramsey optimal policy versus time-consistent policy rejects time-consistent policy and optimal simple rule for the U.S. Fed during 1960 to 2006, assuming the reference new-Keynesian Phillips curve transmission mechanism with auto-correlated cost-push shock. The number of reduced form parameters is larger with Ramsey optimal policy than with time-consistent policy although the number of structural parameters, including central bank preferences, is the same. The new-Keynesian Phillips curve model is under-identified with Ramsey optimal policy (one identifying equation missing) and hence under-identified for time-consistent policy (three identifying equations missing). Estimating a structural VAR for Ramsey optimal policy during Volcker-Greenspan period, the new-Keynesian Phillips curve slope parameter and the Fed's preferences (weight of the volatility of the output gap) are not statistically different from zero at the 5% level.
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Submitted on : Thursday, June 29, 2017 - 10:58:27 AM
Last modification on : Friday, February 28, 2020 - 3:01:40 PM
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Jean-Bernard Chatelain, Kirsten Ralf. Can We Identify the Fed's Preferences?. 2017. ⟨halshs-01549908v1⟩



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