Economic Insights — How would the economy have evolved had the Fed adopted a different monetary policy stance during the latest tightening cycle? To find out, four economists adopt a novel empirical perspective.
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The Federal Reserve has embraced systematic monetary policy, which means its decisions are data dependent and this dependence follows a pattern understood by the public. Economists generally use monetary policy rules to summarize how the Fed conducts systematic monetary policy. Although these rules offer a useful benchmark, the Fed has never formally adopted one as a strict decision-making mechanism. To get around this problem, many economists use a flexible econometric model called a structural vector autoregression (SVAR). By characterizing systematic monetary policy with an SVAR, we can better understand the Fed’s decisions and assess how the economy would have evolved if, for example, the Fed had been more dovish or hawkish on inflation after the COVID-19 pandemic.
This article appeared in the Second Quarter 2025 issue of Economic Insights. Download and read the full issue.
