Quantifying the Federal Reserve’s Objectives Using a Structural Vector Autoregressive Model

The Federal Reserve’s (Fed’s) objective, namely, its dovish stance, is often blamed for the so-called Great Inflation. A popular proxy for the former 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 Fed’s objective—the targeting rule—relying on a conditional estimator (Galí and Gambetti 2018) that is free of the classical simultaneity problem. We discover that Fed’s targeting rule remained stable during the pre- and post-Volcker periods—the opposite of what is implied through a Taylor rule estimation.