Empirical Economics

, Volume 52, Issue 1, pp 191–227 | Cite as

Searching for the Fed’s reaction function

  • Katrin Wölfel
  • Christoph S. WeberEmail author


There is still some doubt about those economic variables that really matter for the Fed’s decisions. In comparison with other estimations, this study uses the approach of Bayesian model averaging (BMA). The estimations show that over the long-run inflation, unemployment rates and long-term interest rates are the crucial variables in explaining the Federal Funds Rate. In the other two estimation samples, also the fiscal deficit and monetary aggregates were of relevance. There is also evidence for interest rate smoothing. In addition, we account for parameter instability by combining BMA with time-varying coefficient (TVC) modelling. We find strong evidence for structural breaks. Finally, a model average is constructed via an TVC-BMA approach.


Fed Monetary policy reaction functions Model uncertainty Bayesian model averaging Parameter instability 

JEL Classification

E43 E52 E58 



The authors wish to thank Jürgen Kähler and two anonymous referees for very useful comments and suggestions. Furthermore, we are very grateful to Marco J. Lombardi and Feng Zhu for sharing their shadow rate. We would also like to thank Stefan Zeugner and the editor of the journal.


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Copyright information

© Springer-Verlag Berlin Heidelberg 2016

Authors and Affiliations

  1. 1.Institute of EconomicsFriedrich-Alexander-Universität Erlangen-NürnbergErlangenGermany

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