KC Fed: Monetary Policy Amidst Deflationary Pressures

The Kansas City Fed has published an article by Roberto Billi (one of their economists) with the title Was Monetary Policy Optimal During Past Deflation Scares?.

This essay is considered TOP SECRET and the PDF has therefore been copy-protected (jerks!), so there won’t be a lot of extracts posted here.

Mr. Billi uses the Taylor Rule as a measure of monetary policy effectiveness and explains the model and its parameterization in good detail. He uses an inflation response parameter equal to one, providing an appendix to justify this choice … but according to me, this appendix needs a great deal more fleshing out!

He then examines Japanese monetary policy during their deflationary episode of the 1990’s and concludes that monetary policy was too tight. Then he examines US monetary policy and – with the benefit of hindsight – finds that Fed policy in 2000 was too tight; during 2001-03 the fed funds rate was on average 100bp low; during 2004-05, it was 175bp too low. He explains that the discrepency is “mainly due to a substantial wedge between Greenbook forecasts and revised inflation, and to a lesser extent to the effects of the data revisions on the estimate of the output gap”.

2 Responses to “KC Fed: Monetary Policy Amidst Deflationary Pressures”

  1. […] recently highlighted some KC Fed research on monetary policy that concluded that Fed policy was too loose in the period […]

  2. […] a conclusion supported by the KC Fed paper discussed in KC Fed: Monetary Policy Amidst Deflationary Pressures. The problem was also discussed on Econbrowser in the post The Taylor Rule and the Housing Boom, […]

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