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Federal reserve monetary policy and the non-linearity of the Taylor rule

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  • Hayat, Aziz
  • Mishra, Sagarika

Abstract

We propose and estimate a generalized Taylor rule for the monetary policy of the US Federal Reserve (Fed) to find out how the Fed funds rate is sensitive to changes in inflation and output gap variables in the post war period. We find that Fed's monetary policy has only reacted significantly to changes in inflation when they were between approximately 6.5-8.5%. However, the policy stance change on these changes was relatively small. The findings suggest that the US Fed has been too averse to change from its current monetary policy stance, and that it has not reacted noticeably to changes in the US economic activity, as measured by the output gap. The generalized functional form for the monetary policy rule suggests that similar non-linearity exists in the directional change of the Fed rate.

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Bibliographic Info

Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 27 (2010)
Issue (Month): 5 (September)
Pages: 1292-1301

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Handle: RePEc:eee:ecmode:v:27:y:2010:i:5:p:1292-1301

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Web page: http://www.elsevier.com/locate/inca/30411

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Keywords: Monetary policy rule Taylor rule Semi-parametric estimation US Fed rate;

References

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Citations

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Cited by:
  1. Nikolay Markov & Carlos de Porres, 2011. "Is the Taylor Rule Nonlinear? Empirical Evidence from a Semi-Parametric Modeling Approach," Research Papers by the Institute of Economics and Econometrics, Geneva School of Economics and Management, University of Geneva, Institut d'Economie et Econométrie, Université de Genève 11052, Institut d'Economie et Econométrie, Université de Genève.
  2. Kasai, Ndahiriwe & Naraidoo, Ruthira, 2011. "Evaluating the forecasting performance of linear and nonlinear monetary policy rules for South Africa," MPRA Paper 40699, University Library of Munich, Germany.
  3. Naraidoo, Ruthira & Paya, Ivan, 2012. "Forecasting monetary policy rules in South Africa," International Journal of Forecasting, Elsevier, Elsevier, vol. 28(2), pages 446-455.
  4. Klose, Jens, 2011. "Asymmetric Taylor reaction functions of the ECB: An approach depending on the state of the economy," The North American Journal of Economics and Finance, Elsevier, Elsevier, vol. 22(2), pages 149-163, August.
  5. Nikolay Markov & Thomas Nitschka, 2013. "Estimating Taylor Rules for Switzerland: Evidence from 2000 to 2012," Working Papers 2013-08, Swiss National Bank.
  6. Seip, Knut L. & McNown, Robert, 2013. "Monetary policy and stability during six periods in US economic history: 1959–2008: a novel, nonlinear monetary policy rule," Journal of Policy Modeling, Elsevier, Elsevier, vol. 35(2), pages 307-325.

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