Implicit inflation target
In this paper, Shapiro and Wilson, show how extracting sentiment through text analysis of central bank deliberations can be used to directly estimate its short-run loss function, including the implicit inflation target. They find that:
- The FOMC had an implicit inflation target of approximately 1.5 percent on average over the 2000-2013 sample period. This is below the explicit 2 percent target that was publicly announced by the FOMC; and
- The FOMC’s loss is not much affected by economic slack but it depends strongly on both output growth and recent stock market performance.
Taking the Fed at its Word: Direct Estimation of Central Bank Objectives using Text Analytics
Authors: Adam Hale Shapiro, Daniel Wilson
From: Federal Reserve Bank of San Francisco
Rules vs discretion
Cochrane and al. evaluate the monetary policy rules reported in the Fed’s Monetary Policy Reports, i.e.
- TR3 : Taylor rule (1993);
- BA : Balanced-approach rule;
- FD : First-difference rule; and
- NPP : An inflation-tilting rule, that is a rule with a higher response coefficient concerning inflation than the Taylor (1993) rule.
Policy discretion is modeled as residuals or deviations from policy rules. Their results show that the rules in the Fed’s Report would have worked well, though the first difference rule is not robust to different model assumptions. In addition:
The measures of discretion show that there was much discretion in the 1970s. The timing indicates that and that these discretionary actions led to poor economic performance. In contrast, the measures of discretion with all the rules reported by the Fed were small in most of the 1980s and 1990s, a period of relatively good macroeconomic performance. We find that the measures of discretion began to grow again in the early 2000s, though did not get as large as in the 1970s,
and we noted that this occurred just prior to the great recession.
Evaluating Rules in the Fed’s Report and Measuring Discretion
Authors: John H. Cochrane, John B. Taylor, Volker Wieland
From: Stanford University, Goethe University at Frankfurt