Shifting Preferences at the Fed: Evidence from Rolling Dynamic Multipliers and Impulse Response Analysis

Abstract

We derive a new method of modelling the Taylor Rule in a system setting which expressly accounts for its combination of I(0) and I(1) series. Using a long sample of US data, our model provides modest support for an inertial Taylor-type rule. However, estimation across rolling windows indicates that the inflation and output preferences of the Fed have varied signicantly through time, presumably reflecting the prevailing economic and political conditions, its chairmanship, and the composition of the FOMC. Our most signicant finding is that the Taylor Principle was robustly upheld under Volcker, often upheld pre-Volcker but rarely observed post-Volcker.

Keywords: System Estimation with Mixed I(0) and I(1) Variables, Long-Run Structural Modelling, Rolling Estimation, Taylor Rule

JEL Classification: C13, C51, E58, N10