Drifts and volatilities: Monetary policies and outcomes in the post WWII US

Timothy Cogley, Thomas Sargent

    Research output: Contribution to journalArticle

    Abstract

    For a VAR with drifting coefficients and stochastic volatilities, we present posterior densities for several objects that are pertinent for designing and evaluating monetary policy. These include measures of inflation persistence, the natural rate of unemployment, a core rate of inflation, and 'activism coefficients' for monetary policy rules. Our posteriors imply substantial variation of all of these objects for post WWII US data. After adjusting for changes in volatility, persistence of inflation increases during the 1970s, then falls in the 1980s and 1990s. Innovation variances change systematically, being substantially larger in the late 1970s than during other times. Measures of uncertainty about core inflation and the degree of persistence covary positively. We use our posterior distributions to evaluate the power of several tests that have been used to test the null hypothesis of time-invariance of autoregressive coefficients of VARs against the alternative of time-varying coefficients. Except for one, we find that those tests have low power against the form of time variation captured by our model.

    Original languageEnglish (US)
    Pages (from-to)262-302
    Number of pages41
    JournalReview of Economic Dynamics
    Volume8
    Issue number2 SPEC. ISS.
    DOIs
    StatePublished - Apr 2005

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    Coefficients
    Second World War
    Monetary policy
    Inflation
    Volatility persistence
    Innovation
    Natural rate of unemployment
    Invariance
    Inflation persistence
    Activism
    Core inflation
    Posterior distribution
    Uncertainty
    Time-varying coefficients
    Time variation
    Persistence
    Monetary policy rules
    Stochastic volatility

    ASJC Scopus subject areas

    • Economics and Econometrics

    Cite this

    Drifts and volatilities : Monetary policies and outcomes in the post WWII US. / Cogley, Timothy; Sargent, Thomas.

    In: Review of Economic Dynamics, Vol. 8, No. 2 SPEC. ISS., 04.2005, p. 262-302.

    Research output: Contribution to journalArticle

    Cogley, Timothy ; Sargent, Thomas. / Drifts and volatilities : Monetary policies and outcomes in the post WWII US. In: Review of Economic Dynamics. 2005 ; Vol. 8, No. 2 SPEC. ISS. pp. 262-302.
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