Real time data, regime shifts, and a simple but effective estimated Fed policy rule, 1969-2009

Estimates of Taylor rule equations for Federal Reserve policy over periods before the Greenspan period are misleading. Until 1979 Fed policy changed the real funds rate in response to the output gap, with no response to an inflation target. During the Volcker period the policy rule kept the real funds rate at a high but constant level, with no response to the output gap. Taking into account the regime shifts, a simple but effective funds rate equation can be estimated using only inflation and output gap.