Monetary Policy Regimes in Macroeconomic Data: An Application of Fractal Analysis

Abstract

This paper examines macromonetary data for behavioral stability over Alan Greenspan's tenure as chairman of the Federal Reserve System. Five self-affine fractal analysis techniques for estimating the Hurst exponent, Mandelbrot-Lévy characteristic exponent, and fractal dimension are employed to explore the data's fractal properties. Techniques employed are rescaled-range analysis, power-spectral density analysis, roughness-length analysis, the variogram or structure function method, and wavelet analysis. Formal hypothesis tests provide evidence of a change in monetary policy behavior between the 1989-1996 and 1997-2003 periods. This change is manifested both in the behavior and distribution of the month-to-month changes in the monetary aggregates, ratios, and multipliers, and in the behavior and distribution of macroeconomic data. Strong evidence is presented that U.S. monetary policy became actively interventionist after December 1996, and that the effectiveness of the Federal Reserve System has been lowered compared to the earlier period.