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Moment conditions model averaging with an application to a forward-looking monetary policy reaction function

Luis F. Martins
Publication Year 
JEL Code 
C22 - Time-Series Models
C52 - Model Evaluation and Testing
E43 - Determination of Interest Rates; Term Structure of Interest Rates
E52 - Monetary Policy (Targets, Instruments, and Effects)
In this paper, we examine the empirical validity of the baseline version of the forward-looking monetary policy reaction function proposed by Clarida, Gali, and Gertler (2000). For that purpose, we propose a moment conditions model averaging estimator in the Generalized Method of Moments and Generalized Empirical Likelihood setups. We derive some of their asymptotic properties under correctly specified and misspecified models. Although the model averaging estimates and the standard procedures point to a stabilizing policy rule during the Paul Volcker and Alan Greenspan tenures but not so during the pre-Volker period, our results cast serious doubts on the significance of the cyclical output variable as a forcing variable in the FED funds dynamics during the Volcker-Greenspan period.
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