Were There Regime Switches in U.S. Monetary Policy?

Christopher A Sims, Tao Zha
2006 The American Economic Review  
A multivariate model, identifying monetary policy and allowing for simultaneity and regime switching in coefficients and variances, is confronted with US data since 1959. The best fit is with a version that allows time variation in structural disturbance variances only. Among versions that allow for changes in equation coefficients also, the best fit is for a one that allows coefficients to change only in the monetary policy rule. That version allows switching among three main regimes and one
more » ... n regimes and one rarely and briefly occurring regime. The three main regimes correspond roughly to periods when most observers believe that monetary policy actually differed, but the differences among regimes are not large enough to account for the rise, then decline, in inflation of the 70's and 80's. In versions that insist on changes in the policy rule, the estimates imply monetary targeting was central in the early 80's, but also important sporadically in the 70's. of the equilibrium and hence vulnerability of the economy to "sunspot" fluctuations of arbitrarily large size. Their estimated policy rule for the later period, on the other hand, implied no such indeterminacy. These results apparently provide an explanation of the volatile and rising inflation of the 70's and of its subsequent decline. There are other interpretations of the evidence, however. Primiceri (2003) and Sargent, Williams, and Zha (2004) estimate models that find only modest changes in policy in the past four decades. Bernanke and Mihov (
doi:10.1257/000282806776157678 fatcat:ttfodmb57vaelp7k5gfbycaebe