02168cam a22002417 4500001000700000003000500007005001700012008004100029100002300070245007300093260006600166490004200232500001500274520120900289530006101498538007201559538003601631690006501667710004201732830007701774856003801851856003701889w14151NBER20170423220258.0170423s2008 mau||||fs|||| 000 0 eng d1 aHamilton, James D.10aMacroeconomics and ARCHh[electronic resource] /cJames D. Hamilton. aCambridge, Mass.bNational Bureau of Economic Researchc2008.1 aNBER working paper seriesvno. w14151 aJune 2008.3 aAlthough ARCH-related models have proven quite popular in finance, they are less frequently used in macroeconomic applications. In part this may be because macroeconomists are usually more concerned about characterizing the conditional mean rather than the conditional variance of a time series. This paper argues that even if one's interest is in the conditional mean, correctly modeling the conditional variance can still be quite important, for two reasons. First, OLS standard errors can be quite misleading, with a "spurious regression" possibility in which a true null hypothesis is asymptotically rejected with probability one. Second, the inference about the conditional mean can be inappropriately influenced by outliers and high-variance episodes if one has not incorporated the conditional variance directly into the estimation of the mean, and infinite relative efficiency gains may be possible. The practical relevance of these concerns is illustrated with two empirical examples from the macroeconomics literature, the first looking at market expectations of future changes in Federal Reserve policy, and the second looking at changes over time in the Fed's adherence to a Taylor Rule. aHardcopy version available to institutional subscribers. aSystem requirements: Adobe [Acrobat] Reader required for PDF files. aMode of access: World Wide Web. 7aE52 - Monetary Policy2Journal of Economic Literature class.2 aNational Bureau of Economic Research. 0aWorking Paper Series (National Bureau of Economic Research)vno. w14151.4 uhttp://www.nber.org/papers/w1415141uhttp://dx.doi.org/10.3386/w14151