Playing by the Taylor rules or sticking to Friedman's policy: Replicatication package.
Description
This study develops a novel identification method to analyze key shifts in US monetary policy, contributing to ongoing debates on policy effectiveness and macroeconomic stability. We find that before the mid-1980s, the Federal Reserve adhered to Friedman's policy of a steady money growth, operating with no interest rate smoothing. In contrast, after the mid-1980s, the Fed transitioned to a Taylor-rule framework that incorporated generalized interest rate smoothing and began relying on forward-looking indicators from financial and housing markets. The interest rate smoothing and the use of these indicators contributed to substantial reductions in inflation and unemployment volatility, with the smoothing potentially reflecting the application of a Kalman-style information filter to improve data interpretation. Our findings underscore the importance of integrating broader economic indicators and advanced data analysis, which can enhance the Federal Reserve’s ability to stabilize inflation and support employment amid evolving economic conditions.
Files
Steps to reproduce
1. Install R and RStudio, open RStudio. 2. Set the working directory using setwd('#folder name#') command. The working directory must contain file "main.R" and the other files distributed with the replication package. 3. Run file "main.R". If an error is thrown, and the message says a package is missing, install the respective package using command install.packages('#package name#') and ran 'main.R' again. This will create all figures and calculate all tables for the paper. The Figures will be placed in folder "paperfg", the tables will be printed in the prompt. 4. How to reestimate a model. Once a model is estimated, it is saved to folder "models". Next time it is not reestimated, but downloaded from this folder. To reestimate this model, either remove file #model name#.RDS from this folder or do not specify the model name in 'load.or.estimate' function.