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July/August 2001, 
Vol. 83, No. 4
Posted 2001-07-01

Measuring Systematic Monetary Policy

by Kevin D. Hoover and Oscar Jordá

The authors analyze systematic monetary policy in a VAR framework. The key insight—originally by John Cochrane—is that the effect of systematic monetary policy depends on the balance of economic actors between those who behave as ideal new classical agents (frictionless competitors with rational expectations) and those who follow rules of thumb or face other frictions. The authors suggest a method of using regime changes (the Lucas critique) to identify that balance empirically.