Time-varying response of monetary policy to macroeconomic conditions

We reject the hypothesis that the Federal Reserve's response to the macroec onomy over the period of 1953-1994 can be accurately represented with a fix ed-parameter discrete choice model. Thus, we model the Fed's time-varying r esponse with a nonlinear Kalman filter The estimated time paths of the reac tion function coefficients suggest that the Fed has responded countercyclic ally to movements in the price level except for the middle 1970s when it ac commodated inflation. The Fed has generally responded countercyclically to unemployment and output during recessions. However, it has not maintained a countercyclical policy during nonrecessionary rimes until the 1980s.