The rate of inflation in the U.S. has declined from an average of 4.5% in the period 1960–79 to an average of 3.6% in 1980–98. Between those two periods, the standard deviations of inflation and the output gap have also declined. These facts can be attributed to the interaction of three possible factors: a shift in central bank preferences, a reduction in the variability of aggregate supply shocks, and a more efficient conduct of monetary policy. In this paper we identify the relative roles of these factors. Our framework is based on the estimation of a small structural macro model for the U.S. economy jointly with the first order conditions, which solve the intertemporal optimization problem faced by the Fed. Overall, our results indicate that the policy preferences of the Fed, and in particular the (implicit) inflation target, have changed drastically with the advent of the Volcker– Greenspan era. In addition, we find that the variance of supply shocks has been lower and monetary policy has been conducted more efficiently during this period.