Structural changes in the US economy: Bad Luck or Bad Policy?

This paper investigates the relationship between changes in the output and inflation processes and monetary policy in the US over the last 25 years. It estimates a structural Bayesian TVC-VAR, where sign restrictions are used to identify monetary policy shocks, and analyzes the transmission of disturbances to the non-systematic and to the systematic component of monetary policy. Impulse responses are calculated as the difference between two conditional expectations, differing for a shock in the conditioning sets. We find structural variations the coefficients of the model but the changes are localized in time and unsyncronized with the changes in the monetary policy equation. Changes in the variance of structural shocks are qualitatively more relevant. The transmission of policy disturbances has hardly changed over the last 25 years and variations in the systematic component of policy have minor effects on the dynamics of the system. Inflation persistence varies over time but its variations are disconnected with the dynamics of monetary policy. Results are robust to a number of alterations in the auxiliary assumptions.