DP3211 | Technology Shocks and Monetary Policy: Assessing the Fed's Performance

Publication Date

20/02/2002

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Abstract

The purpose of the present Paper is twofold. First, we characterize the Fed?s systematic response to technology shocks and its implications for US output, hours and inflation. Second we evaluate the extent to which those responses can be accounted for by a simple monetary policy rule (including the optimal one) in the context of a standard business cycle model with sticky prices. Our main results can be described as follows: First, we detect significant differences across periods in the response of the economy (as well as the Fed?s) to a technology shock. Second, the Fed?s response to a technology shock in the Volcker-Greenspan period is consistent with an optimal monetary policy rule. Third, in the pre-Volcker period the Fed?s policy tended to over stabilize output at the cost of generating excessive inflation volatility. Our evidence reinforces recent results in the literature suggesting an improvement in the Fed?s performance.