Inference Using Qualitative and Quantitative Information with an Application to Monetary Policy

I propose a framework for drawing inferences about an unobserved variable using qualitative and quantitative information. Using this framework, I study the timing and persistence of monetary policy regimes and compute probabilistic measures of the qualitative indicator's reliability. These estimates suggest that (1) it is over one and one-half times more likely that monetary policy is not restrictive at any point in time, (2) Boschen and Mills's [1995] policy index is a reliable indicator of the stance of monetary policy, and (3) certain qualitative indicators of monetary policy improve interest rate forecasts that are based on linear forecasting models