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Monetary policy and the private sector behaviour of the U.S. economy are modelled as a time varying structural vector autoregression, where the sources of time variation are both the coefficients and the variance covariance matrix of the innovations. The paper develops a new, simple modelling strategy for the law of motion of the variance covariance matrix and proposes an efficient Markov chain Monte Carlo algorithm for the model likelihood/posterior numerical evaluation. The main empirical conclusions are: (1) both systematic and non-systematic monetary policy have changed during the last 40 years—in particular, systematic responses of the interest rate to inflation and unemployment exhibit a trend toward a more aggressive behaviour, despite remarkable oscillations; (2) this has had a negligible effect on the rest of the economy. The role played by exogenous non-policy shocks seems more important than interest rate policy in explaining the high inflation and unemployment episodes in recent U.S. economic history.
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Giorgio E. Primiceri
The Review of Economic Studies
Northwestern University
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Giorgio E. Primiceri (Fri,) studied this question.
www.synapsesocial.com/papers/69d83b14617ce96c42ae354f — DOI: https://doi.org/10.1111/j.1467-937x.2005.00353.x