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A Generalized Interest Rates Model with Scaling

Author

Listed:
  • Guizhou Wang

    (Faculty of Science and Technology, University of Stavanger, 4036 Stavanger, Norway.)

  • Kjell Hausken

    (Faculty of Science and Technology, University of Stavanger, 4036 Stavanger, Norway.)

Abstract

The article introduces scaling and generalizes the Taylor (1993) interest rate rule from four terms to seven terms. The three additional terms are the deviation in money supply, the deviation in money velocity, and the deviation in unemployment rate. The four original terms are the inflation rate, the equilibrium real interest rate, the deviation in inflation rate, and the deviation in real GDP (Gross Domestic Product). The weights for the seven terms are estimated via the monthly January 1, 1959 - March 31, 2022 US data. All the seven combinations of the Taylor (1993) rule, the Quantity Equation (Friedman, 1970), and the Phillips (1958) curve with scaling give substantially better results than both Taylor (1993, 1999) rules without scaling. The Phillips (1958) curve is best when choosing only one rule with scaling. Combining the Taylor (1993) rule and the Phillips (1958) curve is best when choosing among two rules with scaling.

Suggested Citation

  • Guizhou Wang & Kjell Hausken, 2022. "A Generalized Interest Rates Model with Scaling," International Journal of Economics and Financial Issues, Econjournals, vol. 12(5), pages 143-150, September.
    • Handle: RePEc:eco:journ1:2022-05-16
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    References listed on IDEAS

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    More about this item

    Keywords

    Monetary Policy; Taylor Rules; Phillips Curve; Interest Rate; Inflation Rate; Money Supply; Money Velocity; Unemployment Rate;
    All these keywords.

    JEL classification:

    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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