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Testing for Stabilizing Monetary Policy Rules: How Robust to Alternative Specifications?

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Author Info
Kevin Carey (American University)
Abstract

A common hypothesis of interest in estimated Taylor rules is whether the Federal Funds rate increases more than one-for-one with inflation; a rule with this characteristic is described as stabilizing. This paper discusses the interaction of this hypothesis with the widespread use of a partial adjustment model, in the context of sub-sample stability and robustness to the assumed exclusion of the long bond rate. Estimated rules display sharply different behavior in the 1980s versus the 1990s, and the degree of inertia -- on which the calculated policy response depends -- rises to implausibly high levels in the 1990s. The rising inertia sharpens the non-linearity of the model, imparting fragility to the stabilization inference. Long bond inclusion mitigates these problems, but alternatives to partial adjustment, with a more flexible approach to autocorrelation, also show promise.

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Publisher Info
Article provided by Berkeley Electronic Press in its journal Topics in Macroeconomics.

Volume (Year): 1 (2001)
Issue (Month): topics/1/1 ()
Pages: 1023-1023
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Handle: RePEc:bep:mactop:v:1:y:2001:i:topics/1/1:p:1023-1023

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Related research
Keywords: Taylor Rule inertia partial adjustment inflation scare

Find related papers by JEL classification:
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules And Macroeconomic Stability: Evidence And Some Theory," The Quarterly Journal of Economics, MIT Press, vol. 115(1), pages 147-180, February. [Downloadable!] (restricted)
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  2. Ben S. Bernanke & Ilian Mihov, 1998. "Measuring Monetary Policy," The Quarterly Journal of Economics, MIT Press, vol. 113(3), pages 869-902, August. [Downloadable!] (restricted)
    Other versions:
  3. Yash P. Mehra, 1999. "A forward-looking monetary policy reaction function," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 33-54. [Downloadable!]
  4. Bagliano, Fabio C. & Favero, Carlo A., 1998. "Measuring monetary policy with VAR models: An evaluation," European Economic Review, Elsevier, vol. 42(6), pages 1069-1112, June. [Downloadable!] (restricted)
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  5. Sharon Kozicki, 1999. "How useful are Taylor rules for monetary policy?," Economic Review, Federal Reserve Bank of Kansas City, issue Q II, pages 5-33. [Downloadable!]
  6. Bennett T. McCallum, 1994. "Monetary Policy and the Term Structure of Interest Rates," NBER Working Papers 4938, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Nicholas M. Kiefer & Timothy J. Vogelsang & Helle Bunzel, 2000. "Simple Robust Testing of Regression Hypotheses," Econometrica, Econometric Society, vol. 68(3), pages 695-714, May.
  8. Hsu, Chiente & Kugler, Peter, 1997. "The Revival of the Expectations Hypothesis of the US Term Structure of Interest Rates," Economics Letters, Elsevier, vol. 55(1), pages 115-120, August. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Anders Møller Christensen & Heino Bohn Nielsen, 2005. "US Monetary Police 1988-2004: An Empirical Analysis," FRU Working Papers 2005/01, University of Copenhagen. Department of Economics. Finance Research Unit. [Downloadable!]
  2. Ramón Maria-Dolores & Jesus Vazquez, 2006. "The relative importance of Term Spread, Policy Inertia and Persistent Monetary Policy Shocks in Monetary Policy Rules," Computing in Economics and Finance 2006 6, Society for Computational Economics. [Downloadable!]
  3. Jesus Vazquez, 2004. "Does the Term Spread Play a Role in the Fed's Reaction Function? An Empirical Investigation," Computing in Economics and Finance 2004 52, Society for Computational Economics. [Downloadable!]
  4. Jesús Vazquez, 2004. "Does the Term Spread play a role in the FED\'S reaction function? ," DFAEII Working Papers 200402, University of the Basque Country - Department of Foundations of Economic Analysis II. [Downloadable!]
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