Eric M. Leeper and Tao Zha
Federal Reserve Bank of Atlanta
Working Paper 99-22
December 1999

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This paper brings together identification and forecasting in a positive econometric analysis of policy. We contend that a broad range of important policy questions is consistent with the existing policy process and is not subject to Lucas's critique. We analyze the economics of "business as usual" and show that modest policy interventions, whose effects can be projected even if expectations are modeled as depending solely on past policy, can address routine questions like those raised at regular policy meetings. And modest interventions matter: they can shift the projected paths and probability distributions of macro variables in economically meaningful ways.

JEL classification: E52, E47, C53

Key words: monetary policy, identification, forecasting, policy analysis, VAR, Lucas critique

The authors thank Ralph Bryant, Tom Cooley, Jon Faust, John Geweke, Adrian Pagan, Peter Pedroni, Anders Vredin, seminar participants at the Federal Reserve Board, the Federal Reserve Bank of Cleveland, Sveriges Riksbank, the Stockholm School of Economics, and Stockholm University (IIES), and especially David Gordon, Chris Sims, and Dan Waggoner for helpful suggestions and Clark Burdick for computational help. The views expressed here are the authors' and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors' responsibility.

Please address questions regarding content to Eric Leeper, Department of Economics, Indiana University, 304 Wylie Hall, Bloomington, Indiana 47405,; or Tao Zha, Research Department, Federal Reserve Bank of Atlanta, 104 Marietta Street, NW, Atlanta, Georgia 30303-2713, 404/498-8353, 404/498-8956 (fax),