Price stability vs. output stability: tales of federal reserve administrations

This study disentangles policy parameters from those describing private sector behavior by simultaneously estimating an empirical model for inflation and output along with a loss function for the last three Federal Reserve administrations. Three important results emerge: First, the Federal Reserve appears to put more emphasis on price stability than output stability when the entire sample is considered. Second, and more importantly, the loss function parameters exhibit structural break at the time Paul Volcker was appointed chairman. The accommodative characteristics of monetary policy were replaced with a more active policy towards controlling inflation. Finally, interest rate smoothing is found to bean important feature of the monetary policymaking process for all three administrations. © 2002 Elsevier Science B.V. All rights reserved.