Dynamic Limited Dependent Variable Modeling and US Monetary Policy

Abstract

I estimate, using real-time data, a forward-looking monetary policy reaction function that is dynamic and that also accounts for the fact that there are substantial restrictions in the period-to-period changes of the Fed's policy instrument. I find a substantial contrast between the periods before and after Paul Volcker's appointment as Fed Chairman in 1979, both in terms of the Fed's response to expected inflation and in terms of its response to the (perceived) output gap: In the pre-Volcker era the Fed's response to inflation was substantially weaker than in the Volcker-Greenspan era; conversely, the Fed seems to have been more responsive to real activity in the pre-Volcker era than later