ABSTRACT
This chapter estimates a simple model of the Federal Reserve's "reaction function"—that is, the relationship between economic developments and the Fed's response to them. It provides an estimation of reaction functions for three separate empirical subsamples delineated by the identity of the Fed Chairman. Specifically, the chapter consider the terms of Arthur Burns (1970.Q1-1978.Q1), Paul Volcker (1979.Q3-1987.Q2), and Alan Greenspan (1987.Q3-present). The organizing principle for the investigation is the Taylor rule, which is used as a rough gauge for characterizing and evaluating the broad differences in the relative weights given to monetary policy goal variables between periods. The chapter looks at several issues in estimating a reaction function based on the Taylor rule, including the specification of dynamics, the equilibrium real rate, the inflation target, and the output gap.
