Monetary Policy and Shocks: A Comparative Study of the 70s and the Post-Pandemic Era

Abstract

This thesis examines the evolution of the Federal Reserve’s monetary policy in response to supply shocks by comparing the 1970s and the post-pandemic era. It conducts a historical analysis of the Fed's policies, exploring their divergence from the Taylor Rule using a Structural Vector Autoregressive (SVAR) model and counterfactual analysis. The findings highlight key differences between the two periods in economic structure and policy frameworks. While the 1970s saw prolonged inflation due to policy divergence, the post-pandemic era shows a more nuanced approach informed by past experiences. The study underscores the importance of rule-based policies while acknowledging the need for flexibility in addressing unique challenges.