US Monetary Policy and Indeterminacy

Abstract

In this paper, I investigate the stance of the US monetary policy in the postwar period. To this end, I show that two features are key: a rich structural model and a parameterization of the indeterminate solution that ensures a sufficient exploration of the indeterminacy region during the estimation procedure. Therefore, I estimate a medium-scale model on the US macroeconomic data using a novel solution method to allow for indeterminacy. The evidence of a passive monetary policy in the pre-1979 period is pervasive and robust to the use of alternative model specifications and data. By contrast, the evidence of an active stance after 1979 is overturned if the period of the Volcker disinflation is excluded or if the model is estimated including a time-varying inflation target and data on inflation expectations.