MONETARY POLICY RULES AND MACROECONOMIC
STABILITY: EVIDENCE AND SOME THEORY*
RICHARD CLARIDA
JORDI GALI ´
MARK GERTLER
We estimate a forward-looking monetary policy reaction function for the
postwar United States economy, before and after Volcker’s appointment as Fed
Chairman in 1979. Our results point to substantial differences in the estimated
rule across periods. In particular, interest rate policy in the Volcker-Greenspan
period appears to have been much more sensitive to changes in expected ination
than in the pre-Volcker period. We then compare some of the implications of the
estimated rules for the equilibrium properties of ination and output, using a
simple macroeconomic model, and show that the Volcker-Greenspan rule is
stabilizing.