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Federal Reserve Bank of Atlanta
FRB Atlanta Working Paper
Modest policy interventions
Eric M. Leeper
Tao Zha

The authors present a framework for computing and evaluating linear projections of macro variables conditional on hypothetical paths of monetary policy. A modest policy intervention is a change in policy that does not significantly shift agents' beliefs about policy regime and does not generate quantitatively important expectations-formation effects of the kind Lucas (1976) emphasizes. The framework is applied to an econometric model of U.S. postwar monetary policy behavior. It finds that a rich class of interventions routinely considered by the Federal Reserve are modest and their impacts can be reliably forecast by an accurately identified linear model. Moreover, modest interventions can matter: They may shift the projected paths and probability distributions of macro variables in economically meaningful ways.

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Eric M. Leeper & Tao Zha, Modest policy interventions, Federal Reserve Bank of Atlanta, FRB Atlanta Working Paper 2002-19, 2002.
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Keywords: Monetary policy ; Forecasting ; Vector autoregression
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