Frequency Dependence in a Real-Time Monetary Policy Rule

We estimate a monetary policy rule for the US allowing for possible frequency dependence i.e., allowing the central bank to respond differently to persistent innovations than to transitory innovations, in both the real-time unemployment rate and the real-time inflation rate. The method is flexible, and requires no strong a priori assumptions on the pattern of frequency dependence or on the nature of the data-generating process. The data convincingly reject linearity i.e., coefficients independent of frequency in the monetary policy rule, in the direction suggested by theory. Our two major findings are, in terms of the interest rate 1) the Volcker-Greenspan-Bernanke central bank responds more strongly to unemployment rate fluctuations than previous regimes do and 2) while the VolckerGreenspan-Bernanke central bank reacts positively to persistent inflation fluctuations, it actually responds negatively to inflation fluctuations at higher frequencies. JEL Codes: E52, C22, C32