Quantifying the Federal Reserve's objectives using a structural vector autoregressive model

The objective of the Federal Reserve (the Fed), namely, its dovish stance, is often blamed for the so-called Great Inflation. A popular proxy for the Fed's dovish stance is constructed using the inflation coefficients in estimated Taylor rules. However, for a welfare-optimizing central bank, the estimated Taylor coefficients are not sufficient for inferring its underlying preference. We quantify the Fed's objective—the targeting rule—relying on a conditional estimator that is free of the classical simultaneity problem. We discover that the Fed's targeting rule remained stable during the pre- and post-Volcker periods—the opposite of what is implied through a Taylor rule estimation.