JOURNAL OF ECONOMICSAND FINANCE 9 Volume 25 9 Number I 9 Spring 2001 23

Analyzing Fed Behavior Using

a Dynamic Taylor-Type Rule
W i l l i a m L. S e y f r i e d a n d D a l e S. B r e m m e r "

Abstract

This paper estimates a dynamic Taylor-type model in

order to analyze the behavior of the Federal Reserve under the
leadership of three different Fed chairs: Arthur Burns, Paul
Volcker, and Alan Greenspan. The model proves useful in
distinguishing the conduct of monetary policy under each.
Burns is found to have paid little attention to inflation and
inflationary pressures. Volcker focused on reducing actual
inflation during his first term while turning his attention to the
GDP gap and inflationary pressures in his second term.
Greenspan emphasized preemptive strikes against inflation as
indicated by high weights attributed to the GDP gap and
expected inflation. (JEL E52)

Introduction

The conduct of monetary policy has been the issue of much research with economists
traditionally divided into two camps--those advocating active or discretionary policy and those
favoring passive policy and the use of rules. Monetarists were early proponents of rules,
particularly a monetary rule in which the money supply would grow at a specific rate over time
without reacting to changing economic conditions. Efforts to stabilize the economy by using
discretionary policy were thought to be futile due to limited information about economic behavior
and lags in the time during which monetary policy takes effect. Thus, discretionary policy was
actually considered likely to be destabilizing. Since then, other types of monetary policy rules
have been suggested including targeting the price level and economic growth.
John Taylor (1993) has developed a rule that recommends setting the federal funds rate based
on the output gap, current inflation, and the difference between current inflation and an inflation
target. Taylor's rule has the simplicity of including the factors that weigh on the Fed's mind as it
considers monetary policy. If inflation is above its target, the federal funds rate should be raised,
and monetary policy should be tightened in an effort to bring inflation down. If actual GDP

9 William L. Seyfried, Department of Accounting, Finance, and Economics, Winthrop University, Rock Hill, SC
29733, seyfriedw@winthrop.edu; Dale S. Bremmer, Department of Humanities and Social Sciences, Rose-Huiman
Institute of Technology,Terre Haute, IN 47803, dale.brernmer@rose-hulman.edu.
24 JOURNAL O F ECONOMICS AND FINANCE 9 Volume 25 * Number I 9 Spring 2001

exceeds potential GDP, implying the corresponding output gap is positive, inflationary pressures
are building, and the Fed should increase the funds rate in a preemptive strike against inflation.
Several issues arise when considering an empirical version of Taylor's Rule. While Taylor
arbitrarily assigned the weights placed on the inflation gap and output gap, they should be
estimated empirically. Another concern is which measure of inflation to include. Should the GDP
deflator be used as originally suggested by Taylor? Alan Greenspan has expressed interest in the
consumption deflator. Perhaps the consumer price index should be used since it is available
sooner, and thus reduces the lag in policy? The use of e x p o s t inflation rate data may be
inappropriate, and survey data about future expected inflation could be used.
This paper extends the work of Judd and Rudebusch (1998) in applying a modified version of
Taylor's rule to three distinct samples of data between 1970 and 1999. Each sample is defined by
the three different men who served as chair of the Federal Reserve during this period. The first
sample consists of Arthur Burns' tenure as Fed chair between 1970.1 and 1978.1. Paul Volcker
was the Fed chair during the second sample of data between 1979.3 and 1987.2. Finally, the last
sample of data is characterized by Alan Greenspan's reign as Fed chair from 1987.3 to the present.
A separate Taylor rule is estimated for each Fed chair, the results are analyzed to see if they are
consistent with the perceptions of Fed policy during those periods, and comparisons are made
between the different regimes. In addition, various measures of inflation are used to assess the
sensitivity of the results. We find that Taylor-type rules perform well in explaining the various Fed
regimes.
Following this introduction is a review of the literature. A discussion of the data, descriptive
statistics, and the statistical properties of the various time series are included in the third section of
the paper. The fourth section of the paper presents and analyzes the model's results for each of the
data samples. A summary and concluding comments are found in the paper's final section.

Literature Review

A successful watcher of the Federal Reserve tries to anticipate the Fed's next response. Will
the federal funds rate be increased, and will credit be tightened? Or, converse!y, will the Fed
increase the size of the monetary base and adopt an easier monetary policy? Since economic
agents persistently try to predict the future actions of the Fed, implicit in this practice is the belief
that the Fed has a consistent response to various economic stimuli. Poole (1999) notes that
economists have suggested that the Fed should pursue a variety of economic goals including high
economic growth, low inflation, low unemployment, low nominal interest rates, stable foreign
exchange markets, and a strong domestic housing sector. While some of these goals might be
mutually exclusive in the short and long run, they at least allow one to predict the Fed's response
to shocks that adversely impact achieving these goals. The pursuit of these goals led to the
specification of various Fed "reaction functions" which show how the central bank responds to a
deviation of an actual economic variable from its targeted level. Much research has been
conducted on central bank reaction functions. Among the earliest works are Bailey (1962) and
Poole (1970), the former modeling the short-term interest rate as a function of deviations of the
money supply, price level, and output from desired levels while the latter considered the interest
rate as a function of deviations of money supply growth, inflation, and economic growth from
desired levels.
One of the contributions of the Monetarist school of thought is that, due to the lags involved in
the implementation of monetary policy, discretionary monetary policy may actually be
destabilizing, and the Fed would do better to follow a rule. By following such a rule, the Fed
would maintain credibility and price stability. In the 1950s and the 1960s, Milton Friedman (1969)
advocated the use of his famous monetary rule where the annual growth in the money supply
 JOURNAL O F ECONOMICS AND FINANCE 9 Volume 25 9 Number I 9 Spring 2001 25

should equal the annual growth rate of GDP. Work found in the time-inconsistency literature, such
as Kydland and Prescott (1977), Barro and Gordon (1983), and Blanchard and Fischer (1989),
demonstrates the optimality of monetary policy based on rules rather than discretionary monetary
policy. Using a monetarist approach, McCallum (2000) suggests a rule consisting of the monetary
base as a function of the targeted growth in nominal output, base velocity, and deviations of
lagged nominal growth from its targeted rate. He finds Fed policy to be too loose during the
1970s, becoming more appropriate during the 1980s, slightly too loose in the early 1990s,
somewhat too tight in the mid-90s, and about right in the late 1990s.
Despite the Monetarists' traditional policy prescription of following monetary targets, Evans
(1998, p. 45) notes that the "federal funds rate has been the primary instrument of monetary policy
since 1982." One of the most recognizable general forms of reaction function describing how the
Fed sets the federal funds rate has come to be called the "Taylor rule," named in honor of the
seminal work done by John Taylor (1993). In the basic format of the Taylor rule, the targeted
nominal federal funds rate ~*) is a function of the current inflation rate (zc,), the equilibrium real
interest rate (r,), the output gap in percentage terms, and the deviations of actual inflation from the
targeted inflation rate by the Federal Reserve (nT)- In functional form, the Taylor rule can be
written as:

ft* = 71~t+ rt + 1/2(71~t - 7"Ct*) + I/2 Y, (1)

where Yt is the output gap expressed as a percentage of potential GDP. Taylor assumed that rt and
n,* were both equal to 2 percent, and the weights on Yt and (zcr - n,*) were both equal to 1/2. In
applying his rule to the 1987-1992 period, Taylor found that the proposed rule described the actual
performance of policy very well. He also found that policy rules assuming that exchange rates or
the level of the money supply influences the federal funds rate do not perform as well as equation
(1). The popularity and acceptance of Taylor's rule as a way of describing monetary policy is
evident by its inclusion in M o n e t a r y Trends, a monthly publication by the Saint Louis Fed. In fact,
McCallum (1999) suggests that, relative to his rule, Taylor's rule is "much more realistic in the
sense of pertaining to the central bank's actual instrument variable."
Since 1993, reaction functions similar to Taylor's rule have been subjected to much
estimation and simulation. Orphanides (1998, p. 5) concludes that "Taylor's rule appears to
perform rather well in a variety of models and as such appears to be quite robust to model
specification." While they point out that past attempts to model Fed behavior with a single, stable
equation haven't been successful, Judd and Rudebusch (1998) note that simple Taylor-type rules
capture the key components of more complex models of Fed behavior. They find that a simple
Taylor-type model performs as well as more sophisticated models that include more explanatory
variables, and they characterize the results of Taylor-type models across the spectrum of various
macroeconomic models as robust. They summarize that "the general form of the Taylor rule may
be a good device for capturing the key elements of policy in a variety of policy regimes" (1998, p.
4).
However, Kozicki (1999) argues that Taylor-type rules have only limited uses to decision
makers making real-time decisions. Given small, reasonable changes in the assumptions, she finds
that policy recommendations from Taylor-type rules are not robust, and she questions the
reliability of policy recommendations made with such a rule. Application of a Taylor-type rule
will give different results depending on which measure of potential GDP was used ~ and which

Different measuresof potential GDP come from the Congressional Budget Office (CBO), the InternationalMonetary
Fund (IMF),the Organizationfor EconomicCooperationand Development(OECD), and Standard and Poor's DRI.
26 J O U R N A L O F E C O N O M I C S A N D F I N A N C E 9 Volume 25 9 Number I 9 Spring 2001

price deflator was used to measure inflation. 2 Different policy recommendations are obtained
depending on the weights placed on the deviations from potential GDP and the targeted inflation
rate and the different assumptions made about the real interest rate and the targeted inflation rate.
While Kozicki feels that the Taylor rule should not be used in making policy, she does feel
policymakers can use Taylor-type rules in other applications. First, Taylor rules serve as an easy,
understandable initial place to begin discussions regarding monetary policy. Second, Taylor-type
rules might be useful in educating the public about the issues facing decision makers in the
Federal Reserve. Finally, Taylor-type rules can be used as the Fed's reaction function in closing
forecasting models.
Levin, Weiland, and Williams (1998) find "strong support for rules in which the first-
difference of the federal funds rate responds to the current output gap and the deviation of the one-
year average inflation rate from a specified target." Under alternative models, the first-difference
approach is found to be superior to Taylor's original rule. In addition, this approach is found to
generate similar policy frontiers to more complicated rules but is more robust to model
uncertainty.
Similar to Levin, Weiland, and Williams, Judd and Rudebusch (1998) estimate a dynamic
Taylor-type rule (using first differences of the federal funds rate) over three periods that were
delineated by the Fed chair at the time. 3 They find that their dynamic Taylor-type model
adequately describes Fed behavior as their "estimated reaction functions for each period vary in
ways that seem broadly consistent with the success or failure during the period at controlling
inflation" (Judd and Rudebusch, 1998, p. 4).
During the Greenspan period, the Judd and Rudebusch model tracks the major changes in the
federal funds rate with an R 2 of 0.87. Results from the Burns regime reveal that, while the
predicted federal funds rate was positively correlated with the actual federal funds rate, their
model predicts a federal funds rate that was greater than the actual rate for every quarter. This
result is consistent with the higher inflation that was observed during the Burns regime--inflation
that might have been lower if the federal funds rate was higher. Judd and Rudebusch also find that
their model predicts a lower federal funds rate than actually occurred during the Volcker period.
Again, this result is not surprising, given the aggressive nature of the Fed in reducing inflation
during those years. The empirical analysis below extends the work of Judd and Rudebusch.

Data and Descriptive Statistics

Quarterly data from 1970 to 1999 were obtained for each of the respective variables from the
online database at the Federal Reserve Bank of St. Louis (known as F R E D ) : The federal funds
rate is the average during the quarter. The GDP gap is the percentage difference between actual
real GDP and potential real GDP as estimated by the Congressional Budget Office. Inflation is
measured as the increase in the price level over the preceding four quarters. Various measures of
inflation were considered including the consumer price index (TrCel), GDP deflator (trcoe), and the
personal consumption deflator (Trco~). In addition, two measures o f expected inflation were used:
the University of Michigan survey of consumers (tiM) and the Philadelphia survey of professional
economists (Ire).

2 Kozickiuses the CPI, the core CPI (which excludes foodand energy), the GDP deflator, and the expected inflation
data fromthe Surveyof Professional Forecasterspublished by the Federal Reserve Bankof Philadelphia.
3As do Judd and Rudebusch,we ignorethe termof William Milleras Fed chair becauseof its small sample size.
4 See http://www.stls.frb.org/fred/index.html.
 J O U R N A L O F E C O N O M I C S A N D F I N A N C E 9 Volume 25 9 N u m b e r I 9 Spring 2001 27

Inflation fluctuated significantly during the period, ranging from a low of less than 1 percent
for the GDP and personal consumption deflator (1.3 percent for the CPI) to highs of
approximately 11 percent for the deflators and 14.4 percent for the CPI. Differences in inflation
rates during the reign of each Fed chair can be seen in Table 1.

TABLE 1. AVERAGE INFLATIONRATES AND NOMINALFEDERAL FUNDS RATE (LOW TO HIGH)

Variable Entire Period Burns Volcker Greenspan

no,1 5.3 (1.3-14.4) 6.5 (3.0-12.0) 6.3
(1.3-14.4) 3.3 (1.5-6.3)
r~GDP 4.8 (0.9-1 1.0) 6.4 (3.9-1 1.0) 5.6
(2.5-10.2) 2.8 (0.9-4.6)
rtCON 4.9 (0.7-11.1) 6.1 (3.3-11.1) 5.9
(2.4-11.0) 3.0 (0.7-5.7)
~M 4.2 (2.4-10.2) -- 5.0
(2.5-10.2) 3.2 (2.4-4.7)
r~p 4.0 (2.2-7.8) -- -- 3.5 (2.2-5.0)
fL 7.44 (2.99-17.78) 6.50 (3.54-12.09) 10.69 (6.20-17.8) 5.76 (2.99-9.73)
Notes: For CPI, GDP deflator, personal consumption deflator, and federal funds, the data sample period was 1970.1-
1999.2. The period was 1978.1-1999.2for gMand 1981.3-1999.2for he. All numbers expressed as percentages.

As seen in Table 2, the real federal funds rate varied considerably during the periods
considered, averaging near 0 percent under Burns' time as Fed chair to between 4.4 percent and 7
percent while Paul Volcker was leading the Fed. During Alan Greenspan's tenure, the real federal
funds rate averaged between 2.3 percent and 3 percent, depending upon the measure of inflation
used.

TABLE 2. AVERAGE REAL FEDERALFUNDS RATE USING DIFFERENT INFLATIONRATES

Inflation Measure Entire Period Burns Volcker Greenspan

Xc~ 2.2 0.0 4.4 2.4
r 2.7 0.1 5.1 3.0
~ON 2.6 0.4 4.8 2.7
~M 3.8 -- 5.7 2.6
~p 4.3 -- 7.0 2.3
Notes: For CPI, GDP deflator and personal consumptiondeflator, the data sample period was 1970.1- 1999.2. The period
was 1978.1-1999.2for 7tMand1981.3-1999.2for ~p. All numbers expressed as percentages.

Empirical Model
A modified version of the original Taylor rule can be expressed as:

ft* = nt + r* + BI(~ t - 7[*) + B2yt + B3Yt-I (2)

where the variables are the same as those defined in equation (1). This model presupposes that the
Fed adjusts the federal funds rate immediately in response to changes in the right-hand side
variables. Anecdotal evidence suggests that the Fed may attempt to smooth changes in the federal
funds rate so as to minimize disturbances to financial markets. In addition, caution tends to be
28 JOURNAL OF ECONOMICS AND FINANCE 9 Volume 25 9 Number I 9 Spring 2001

exhibited due to the uncertainty as to how quickly the economy will respond to policy changes.
Recently, a forward-looking basis for interest-rate smoothing has been proposed (Amato and
Laubach 1999). It is suggested that, when a systematic policy is employed, small changes in
policy will be perceived by the public to be long lasting. Thus, under interest-rate smoothing,
incremental changes in interest rates can have big effects since they are expected to persist. Also,
when implemented in a systematic way, there is evidence that such a policy leads to less
macroeconomic volatility. Thus, an adjustment mechanism can be added, patterned after the
capital stock adjustment model:

a f , = ~ , ( f : - f,-O + pAf,.t (3)

where f7 is the federal funds rate from (2). In equation (3), y represents the speed of adjustment
and p is a measure of the persistence of monetary policy. Substituting (2) into (3), one obtains:

Aft= yet - y ft-i + pAfta + Y(l+Bl)rq + yB2Yt + ~B3Yt-I (4)

where ct = r" - B~n*.

As one would expect, the relationship described in (4) was not stable over the entire period:
This was likely due to several factors including changes in Fed regimes, new perspectives as to
how to conduct monetary policy, and changing economic conditions. Thus, it was decided to
examine periods presided over by one Fed chair. Three periods were considered: Arthur Burns'
tenure as Fed chair (1970:1-1978:1), Paul Volcker's tenure (1979:3-1987:2) and the Greenspan era
(1987:3-1999:2). The period when Miller was Fed chair (1978:2-1979:2) was too short for any
meaningful analysis. Once the models for these separate periods were estimated, comparisons as
to the conduct of monetary policy can be made.

Empirical Results
Burns Period (1970:1-1978:1)

For the Burns era, the model was estimated using the three measures of inflation. Since the
contemporaneous GDP gap was found to be insignificant in all three cases, it was dropped and the
model was re-estimated. Results can be seen in Table 3.
The findings are similar regardless of the inflation measure chosen. The weight given to the
inflation gap is negative in each case, while the weight on the lagged GDP gap ranges between
0.60 and 0.84. Given the insignificant coefficient associated with the inflation target, it is not
surprising that inflation was a major problem during his tenure. The Fed appears to have been
reactive rather than proactive as indicated by insignificant values for the coefficient of the GDP
gap and positive values for the coefficients of the lagged GDP gap. In addition, high values for
y, the coefficient associated with ft-l, suggest a more rapid speed of adjustment relative to other
Fed chairs. The regression model that included nce~ had the most explanatory power with an
adjusted R 2 of .64.

s All the regressions in this paper were tested for the appropriate characteristics including parameter stability and
ARCHeffects.
 JOURNAL O F ECONOMICS AND FINANCE 9 Volume 25 9 Number I 9 Spring 2001 29

TABLE 3. BURNS ERA, 1970:1-1978:1

Inflation Af,.l ft-i nt Yt Y,-t ~2

gcPI *0.28 **0.77 -0.36 --- **0.60 0.64

"/tGDP **0.26 **0.56 -0.22 --- **0.84 0.53

ItcoN 0.20 **0.58 -0.32 --- **0.74 0.57

Notes: * denotes significance at the 5 percent level; ** denotes significance at the 1 percent level; X2 or t-test where
appropriate.

V o l c k e r P e r i o d ( 1 9 7 9 : 3 - 1 9 8 7:2)

Paul Volcker's time as chair of the Fed was characterized early on by the use of monetarist
principles to fight inflation. The Fed targeted the growth in the money supply and paid less
attention to the federal funds rate. Once inflation was brought under control, the Fed abandoned
monetarism and returned to the use of the federal funds rate as the primary tool of monetary
policy. Thus, the Volcker era involved two distinct types of monetary regimes. D u m m y variables
were introduced to allow for different relationships in the two periods. D u m m y variables that
proved to be insignificant were dropped and the model was re-estimated. Table 4 shows the results
for the Volcker era. In this case, the model was estimated using nM as well as the three measures of
inflation.

TABLE 4. VOLCKERERA, 1979:3-1987:2

Inflation Aft.. f,-i 7t, y, y,., ~'2

gcvt -- **'0.41 1.30 -0.63 -- 1.36 *-1.30 0.60

7tCDp -- **0.52 ***0.69 **'1.51 -0.30 -- *0.54 **-0.51 0.68

ltcoN -- **'0.41 ***2.52 -0.55 -- *'1.02 ***-1.07 0.52

7ZM -- ***0.38 -0.15 *'2.18 **-1.88 0.53

Notes: Under each parameter, the first estimate corresponds to the Monetaristera, while the second estimate is the one for
the post-Monetaristera. * denotes significanceat the 10 percent level; ** denotes significanceat the 5 percent level; ***
denotes significanceat the 1 percentlevel;X2or t-test where appropriate.

The estimated equations involving ~ZcoN were corrected for ARCH effects. In the monetarist
era, p was approximately zero using all inflation measures, as expected, indicating that there was
little persistence in policy with regard to the federal funds rate. When using current inflation, the
weight for the inflation gap was quite high while the weights for the GDP gap and lagged GDP
gap were zero and negative, respectively. This lends support to the idea that the Fed's overriding
goal was to reduce inflation. However, when using expected inflation, the weight on the current
and lagged GDP gaps were high with the former being positive and the latter negative while the
weight on ~zM was insignificant. The different weights on expected inflation and current inflation
might be due to the emphasis that the Fed placed on reducing actual inflation during this period. In
the post-monetarist era, some persistence in terms of policy was found (i.e., 13 was positive) when
30 JOURNAL OF ECONOMICS AND FINANCE 9 Volume 25 9 Number I 9 Spring 2001

the GDP deflator was used as the measure of inflation. In addition, the weight on the inflation gap
fell considerably, becoming negative for measures of current inflation. Weights for the GDP gap
became significantly positive (no difference on the weights for respective variables were found
between the monetarist and post-monetarist era when including expected inflation). In terms of the
regression with the highest explanatory power, the model including rCGDr had the greatest adjusted
R 2 of .68.

G r e e n s p a n P e r i o d (198 7:3-1999:2)

For the Greenspan era, three measures of inflation and two measures of expected inflation
(both ~u and ~ze) were used to estimate the relationship. Since the lagged GDP gap was found to be
insignificant in every case, it was dropped and the model was re-estimated. The results are
displayed in Table 5.

TABLE 5. GREENSPANERA, 1987:3-1999:2

Inflation Aft.t ft-i 7tt Y, Yt-I ~2

ltcpI **0.56 *'0.19 0.11 **0.77 -- 0.51
n~DP **0.50 **0.25 *0.42 **0.88 -- 0.60
rtCON **0.53 *'0.21 0.04 **0,84 -- 0.55
7ZM **0.46 *'0.17 *'1.67 **0.70 -- 0.54
~p **0.33 **0.23 *'1.09 **0.79 -- 0.68

Notes: * denotes significance at the 5 percent level; ** denotes significance at the 1 percent level; g2 or t-test where
appropriate.

The results can be separated into two categories: one when current inflation is considered and
the other when including expected inflation instead. In the models including current inflation, high
values for the coefficient on the GDP gap and low values for the coefficient on inflation, two of
which are insignificant, imply concern for inflationary pressure (preemptive strikes against
inflation) as opposed to reacting to current levels of inflation. Further support for this is found
when expected inflation is included instead of current inflation. The weights for both measures of
expected inflation are significant and considerably higher than those for inflation while the weight
for the GDP gap remains similar. In addition, the model that includes expected inflation based
upon the Survey of Professional Economists (Tip) displays the most explanatory power. Relative to
the other Fed chairs, Greenspan shows a high degree of persistence in terms of policy (13) and low
speed of adjustment (u supportive of anecdotal evidence concerning the gradualist approach he
has taken.

Summary and Conclusions

In this paper, we develop and estimate a dynamic, Taylor-type rule for the regimes of the
different Fed chairs since 1970. The results provide insight into the behavior of the Fed under the
different chairs. However, weights attributed to the respective variables changed over time. Burns
is found to have focused on the lagged GDP gap and neglected the inflation gap and current GDP
gap. Consequently, his reign as chair was characterized by high rates of inflation. Voleker initially
emphasized the inflation gap over the GDP gap until inflation was brought under control. Later,
 JOURNAL OF ECONOMICS AND FINANCE 9 Volume 25 9 Number I 9 Spring 2001 31

once actual inflation subsided, the Volcker Fed targeted the current GDP gap, an indicator of
inflationary pressures. Greenspan attempted to preempt a rise in inflation as evidenced by high
weights on the current GDP gap. Confirmation of this emphasis on containing future inflation is
found by the very high weights attributed to expected inflation upon its inclusion in the model.
It is interesting to note changing public perceptions of inflation and unemployment and how
they relate to changes in the weights in the estimated reaction functions. Surveys by Gallup (2000)
prior to presidential elections since 1976 reveal the changing public attitudes toward inflation and
unemployment in the last quarter century. In both 1976 and 1980, inflation was the number one
concern of the public, far outdistancing other problems. This helped pressure President Carter to
appoint Paul Volcker as chair of the Fed and contributed to the high weight that he placed on
reducing current inflation. By 1984, though inflation was much more under control,
unemployment remained a major concern, moving up to number one while concern about inflation
declined significantly. This corresponds to a decline in the weight on the inflation gap while the
weight attributed to the GDP gap rose. During the 1990s, concern over inflation and
unemployment continued to decline such that by 2000, only one percent of the public cited
inflation as their primary concern while three percent chose unemployment. At the same time, the
Greenspan Fed focused on preemptive strikes against inflation rather than current economic
problems.
Similar to Amato and Laubach (1999), we find evidence for interest rate smoothing during
Greenspan's tenure. Recent studies indicate that such a policy is more potent in its effects and
results in more macroeconomic stability. Anecdotal evidence confirms that the Greenspan era (a
period characterized by interest-rate smoothing) exhibited much more stability than those of Burns
and Volcker. The results provide useful insights into the changing behavior of the Fed and reasons
why inflation behaved as it did during each period.

References

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