The Reaction Function of The Federal Reserve Post 2008 Financial Crisis

By Michel Cassard. Princeton University. 

This paper uses vector autoregressive analysis to show a change to the Federal Reserve’s reaction function post 2008. The model’s prediction for the stance of Fed policy show that a Taylor Rule identification structure for the Federal Funds Rate no longer holds. Stress to finan- cial markets during the crisis has meant that additional consideration of financial conditions is needed to accurately reflect Fed decision making since the Great Recession.

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