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

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  • Carey Kevin

    ()
    (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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File URL: http://www.degruyter.com/view/j/bejm.2001.1.issue-1/bejm.2001.1.1.1023/bejm.2001.1.1.1023.xml?format=INT
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Bibliographic Info

Article provided by De Gruyter in its journal The B.E. Journal of Macroeconomics.

Volume (Year): 1 (2001)
Issue (Month): 1 (September)
Pages: 1-18

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Handle: RePEc:bpj:bejmac:v:topics.1:y:2001:i:1:n:3

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Cited by:
  1. 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.
  2. Vázquez Pérez, Jesús, 2003. "Does the Term Spread play a role in the FED's reaction function? An Empirical Investigation," DFAEII Working Papers 2004-02, University of the Basque Country - Department of Foundations of Economic Analysis II.

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