Frequency Dependence in a Real-Time Monetary Policy Rule

We estimate a monetary policy rule for the US allowing for possible frequency de- pendence - i.e., allowing the central bank to respond differently to persistent innovations than to transitory innovations, in both the real-time unemployment rate and the real-time inflation rate. The estimation method we use is flexible, and requires no strong a priori as- sumptions on the pattern of frequency dependence or on the nature of the data-generating process. It also allows for possible feedback in the relationship. As suggested by theory, our results convincingly reject linearity in the monetary policy rule in the sense that the coefficients in the monetary policy rule are found to be frequency dependent: the response depends on the persistence of a fluctuation in unemployment or inflation. Our approach also provides useful insights into how the central banks monetary policy rule has varied over time.