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Monetary Policy Dynamics in the United States

Author

Listed:
  • Shodipe Oladimeji T.

    (Kansas State University)

  • Shobande Olatunji Abdul

    (Business School, University of Aberdeen, UK)

Abstract
The recognised approach to designing an optimal monetary policy model is based on the central bank’s ability to mitigate losses using a quadratic criterion subject to the linear structure of the economy. This study examines the United States Federal Reserve’s (Fed) monetary policy in different economic environments. It provides an empirical solution to the central bank’s optimisation problem when preferences are asymmetric in both in˛ation and output gaps. The study tested for structural breaks and uncovered potential evidence of nonlinearities in the Fed’s reaction function, which provides more information on policy objective. The empirical evidence suggests that the Fed’s policy rate differs in these periods. This strongly indicates the presence of asymmetry. Further evidence suggests that the predictive power of the estimated model increases when a smoothing process is allowed.

Suggested Citation

  • Shodipe Oladimeji T. & Shobande Olatunji Abdul, 2021. "Monetary Policy Dynamics in the United States," Open Economics, De Gruyter, vol. 4(1), pages 14-30, January.
    • Handle: RePEc:vrs:openec:v:4:y:2021:i:1:p:14-30:n:2
    DOI: 10.1515/openec-2020-0111
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    More about this item

    Keywords

    Monetary policy; Asymmetric preference; Taylor rule; Structural breaks; United States;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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