Testing for Indeterminacy in U.S. Monetary Policy
We revisit the question of indeterminacy in U.S. monetary policy using identification-robust methods. We find that the conclusions of Clarida, GalÃ, and Gertler (2000) that policy was inactive before 1979 are robust, but the evidence over the Volcker-Greenspan periods is inconclusive because confidence sets are very large. We show that this is in fact what one would expect if policy were indeed active over that period. Problems of identification also arise because policy reaction has been too gradual or excessively smooth recently. All in all, our analysis demonstrates that identification issues should be taken seriously, and that identification-robust methods can be informative even when they produce wide confidence sets.
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