New Publication: “Searching for the Fed’s reaction function”

stack of dollar notes

In a recent article, Katrin Wölfel and Christoph Weber analysed the behaviour of the Federal Reserve System (Fed). The article will later be published in “Empirical Economics”. The online version of this article is already available under This is the abstract of the article: “There is still some doubt about those economic variables that really matter for the Fed’s decisions. In comparison with other estimations, this study uses the approach of Bayesian model averaging (BMA). The estimations show that over the long-run inflation, unemployment rates and long-term interest rates are the crucial variables in explaining the Federal Funds Rate. In the other two estimation samples, also the fiscal deficit and monetary aggregates were of relevance. There is also evidence for interest rate smoothing. In addition, we account for parameter instability by combining BMA with time-varying coefficient (TVC) modelling. We find strong evidence for structural breaks. Finally, a model average is constructed via an TVC-BMA approach.”