NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Modest Policy Interventions

Eric M. Leeper, Tao Zha

NBER Working Paper No. 9192
Issued in September 2002
NBER Program(s):   EFG

We present a framework for computing and evaluating linear projections of macro variables conditional on hypothetical paths of monetary policy. A modest policy intervention is a change in policy that does not significantly shift agents' beliefs about policy regime and does not generate quantitatively important expectations-formation effects of the kind Lucas (1976) emphasizes. The framework is applied to an econometric model of U.S. postwar monetary policy behavior. It finds that a rich class of interventions routinely considered by the Federal Reserve are modest and their impacts can be reliably forecasted by an accurately identified linear model. Moreover, modest interventions can matter: they may shift the projected paths and probability distributions of macro variables in economically meaningful ways.

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Document Object Identifier (DOI): 10.3386/w9192

Published: Leeper, Eric M. and Tao Zha. "Modest Policy Interventions," Journal of Monetary Economics, 2003, v50(8,Nov), 1673-1700. citation courtesy of

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