Monetary policy rules and macroeconomic stability: Evidence and some theory

We estimate a forward-looking monetary policy reaction function for the pos twar United States economy, before and after Volcker's appointment as Fed C hairman in 1979. Our results point to substantial differences in the estima ted rule across periods. In particular, interest rate policy in the Volcker -Greenspan period appears to have been much more sensitive to changes in ex pected inflation than in the pre-Volcker period. We then compare some of th e implications of the estimated rules for the equilibrium properties of inf lation and output, using a simple macroeconomic model, and show that the Vo lcker-Greenspan rule is stabilizing.