Monetary policy reestimated: replicatication package.
Description
We study the US monetary policy before and during the Great Moderation. We propose to use a few assumptions on an abstract dynamic stochastic general equilibrium model to derive restrictions on the associated structural vector autoregression model that identify the monetary policy rule and monetary policy shock. Using the estimated monetary policy rule, we argue that the Federal Reserve implemented the Friedman policy of a steady money growth before the Great Moderation. During the Great Moderation, the monetary policy followed the Taylor rule with generalized interest rate smoothing. The use of smoothing is consistent with the hypothesis that the Federal Reserve applied the optimal information filtering during the Great Moderation, but not before. This and other policy changes account for most of the reduction in macroeconomic volatility in the 1980s. The estimated impulse response functions to the monetary policy shock are large and significant, even on the Great Moderation data.
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 printent 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.