ABSTRACT
Large numbers of Fed reaction functions have been estimated by economists. This chapter summarizes the results of our research paper—Judd and Rudebusch 1998—which provides estimates of a Fed reaction function. It discusses the Taylor rule as a tool for characterizing Fed policy. One factor that may be associated with changes in the Fed’s reaction function over time is changes in the composition of the policymaking body—the Federal Open Market Committee. Such compositional changes may bring to the fore policymakers with different preferences and different conceptions of the appropriate operation and the likely transmission of monetary policy. In essence, the rule describes a policy regime in which the Fed sets the real funds rate with an eye toward controlling inflation and stabilizing the business cycle. The chapter examines whether the rule is capable of capturing the broad differences in how policy was conducted during the tenures of Fed Chairmen Greenspan, Paul Volcker, and Chairman Burns.
