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.