Tracking a central banker's preference: A nonparametric regression approach

Abstract

We examine how the Fed's preference influences the behavior of inflation rate and unemployment rate using US data over the period of 1960-2017. After showing instability in a constant-coefficient regression, we run a nonparametric regression, and find that the Fed's preference parameters have moved, implying that its preference can be represented by the asymmetric preference model putting more weights on high unemployment rate approximately before the era of Volcker's chairmanship and by the inflation targeting model during the 1980s and 1990s. The Fed's preferences again seem concerned about higher unemployment after the Global Financial Crisis.