A0268
Title: Good policy or learning evolution: A Markov-Switching approach to understanding the determinants of Fed policy
Authors: Gabriela Best - California State University, Fullerton (United States) [presenting]
Abstract: The aim is to analyze the determinants of the Federal Reserve's monetary policy decisions since the 1960s justified by potentially evolving beliefs through a real-time learning process about the structure of the economy and Markov-Switching shifts in policymakers' preferences between dove and hawk regimes. We argue that although central bank learning plays an important role in the determination of Fed policy, there were several shifts in policy makers preferences in the post-war period that explain movements in the monetary instrument. We find a dovish kind of monetary policy regime present in the 1970s and early 2000s, and before the onset of the Great Recession. The regime-switching dynamics affect the contribution of the shocks to the variables; in particular, it affects the participation of the MEI, government spending, and technology shocks to the variables; however, the effects are asymmetric across variables and regimes. In addition, we use a recent algorithm to deal with the problem of solving rational expectations models under indeterminacy, and we find that impulse responses take the traditional shape and sign under most hawk regimes (except for earlier in the sample during the 1960s), however, under dovish regimes some impulse responses are non-traditional.
