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

Author

Listed:
  • Christopher A. Sims

    (Princeton University and NBER)

  • 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.

Suggested Citation

  • Christopher A. Sims & Tao Zha, 2005. "Were There Regime Switches in U.S. Monetary Policy?," Working Papers 92, Princeton University, Department of Economics, Center for Economic Policy Studies..
    • Handle: RePEc:pri:cepsud:110
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Counterfactuals; Lucas critique; policy rule; monetary targeting; simultaneity; volatility; model comparison; United States;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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