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ABSTRACT. 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 model that allows time variation in structural disturbance variances only. Among models that allow for changes in equation coefficients also, the best fit is for a model that allows coefficients to change only in the monetary policy rule. That model allows switching among three main 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, and the differences in policy behavior are substantively interesting, though statistically ill-determined. The estimates imply monetary targeting was central in the early 80’s, but also important sporadically in the 70’s. The changes in regime were essential neither to the rise in inflation in the 70’s nor to its decline in the 80’s. I. THE DEBATE OVER MONETARY POLICY CHANGE In an influential paper, Clarida, Galí and Gertler 2000 (CGG) presented evidence that US monetary policy changed between the 1970’s and the 1980’s, indeed that in the 70’s

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From 1960-1983, the standard deviation of annual growth rates in real GDP in the United States was 2.7%. From 1984-2001, the corresponding standard deviation was 1.6%. This paper investigates this large drop in the cyclical volatility OF real economic.activity. The paper has two objectives. The first is to provide a comprehensive characterization of the decline in volatility using a large number of U.S. economic time series and a variety of methods designed to describe time-varying time series processes. In so doing, the paper reviews the literature on the moderation and attempts to resolve some of its disagreements and discrepancies. The second objective is to provide new evidence on the quantitative importance of various explanations for this "great moderation". Taken together, we estimate that the moderation in volatility is attributable to a combination of improved policy (20-30%), identifiable good luck in the form of productivity and commodity price shocks (20-30%), and other unknown forms of good luck that manifest themselves as smaller reduced-form forecast errors (40-60%).

Abstract: This paper uses a simple New Keynesian monetary DSGE model as a prior for a vector autoregression and shows that the resulting model is competitive with standard benchmarks in terms of forecasting and can be used for policy analysis. JEL classification: C11, C32, C53

∗ Preliminary draft. Prepared for the November 2002 Carnegie-Rochsester conference. [Thanks.] The opinions expressed are those of the author and do not necessarily reflect views of the Board of Governors of the Federal Reserve System. 1

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The present paper provides an overview of recent developments in the analysis of monetary policy in the presence of nominal rigidities. The paper emphasizes the existence of several dimensions in which the recent literature provides a new perspective on the linkages among monetary policy, inflation, and the business cycle. It is argued that the adoption of an explicitly optimizing, general equilibrium framework has not been superfluous; on the contrary, it has yielded many insights which, by their nature, could hardly have been obtained with earlier non-optimizing models.

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Schorfheide was visiting the Federal Reserve Bank of Philadelphia, for whose hospitality is thankful. Financial sup-