NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory

Richard Clarida, Jordi Gali, Mark Gertler

NBER Working Paper No. 6442
Issued in March 1998
NBER Program(s):   EFG   ME

We estimate a forward-looking monetary policy reaction function for the postwar US economy, pre- and post-October 1979. Our results point to substantial differences in the estimated rule across periods. In particular, interest rate policy in the Volcker-Greenspan period appears to have been much more sensitive to changes in expected inflation than in the pre-Volcker period. We then compare some of the implications of the estimated rules for equilibrium properties of inflation and output, using a simple macroeconomic model. The pre-Volcker rule is shown to be consistent with the possibility of persistent, self-fulfilling fluctuations in inflation and output. In contrast, the Volcker-Greenspan rule is stabilizing.

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Document Object Identifier (DOI): 10.3386/w6442

Published: Quarterly Journal of Economics, Vol. CXV, issue 1 (2000): 147-180.

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