Monetary policy rules and inflation control in the US

The interplay between policy-setting by the Federal Reserve and inflation is explored during a period with significant and diverse episodes from 1979 onwards. Our unrestricted estimates reveal a stable target path for the policy rate with a strong response to inflation and an effective control over it. We identify moments of discretionary and rule-based policy-making throughout three different chairmanships and quantify the degree of policy inertia. Including the ‘great recession’ and the first years after the crisis leaves the above-mentioned characteristics unchanged and shows that the adjustment to deviations from the target path becomes less gradual. Replacing the federal funds rate with a shadow rate yields ineffective inflation control, indicating that the dynamic behaviour of inflation is affected by the implementation of unconventional policy when the zero lower bound applies. •We estimate a monetary policy rule that is stable during various Fed chairmanships.•The target path for the federal funds rate exhibits a firm response to inflation.•The impulse responses are robust and display an effective control of inflation.•‘Great recession’ causes a swifter adjustment to a path that includes only inflation.•The dynamic behaviour of inflation is affected by the inclusion of a shadow rate.