Price Stability vs. Output Stability: Tales of Federal Reserve Administrations

This study disentangles the policy parameters from those describing the behavior of the private sector by simultaneously estimating an empir-ical model for inflation and output along with a loss function for the mon-etary policy for the last three Federal Reserve administrations. There are three important results: First, the Federal Reserve appears to put more emphasis on price stability than output stability when the entire sample is considered. Second, and more importantly, the loss function parame-ters exhibit a structural break at the time Paul Volcker was appointed as the chairman. The accommodative characteristics of monetary policy were replaced with a more active policy towards controlling inflation. Fi-nally, interest rate smoothing is found to be an important feature of the monetary policymaking process for all three administrations