Technology shocks and monetary policy: assessing the Feds performance

The purpose of the present paper is twofold. First, we characterize the Fedʹs systematic response to technology shocks and its implications for U.S. output, hours and inflation. Second, we evaluate the extent to which those responses can be accounted for by a simple monetary policy rule (including the optimal one) in the context of a standard business cycle model with sticky prices. Our main results can be described as follows: First, we detect significant differences across periods in the response of the economy (as well as the Fedʹs) to a technology shock. Second, the Fedʹs response to a technology shock in the Volcker–Greenspan period is consistent with an optimal monetary policy rule. Third, in the Pre-Volcker period the Fedʹs policy tended to overstabilize output at the cost of generating excessive inflation volatility. Our evidence reinforces recent results in the literature suggesting an improvement in the Fedʹs performance.