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Taylor Rule or optimal timeless policy? Reconsidering the Fed's behavior since 1982

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  • Minford, Patrick
  • Ou, Zhirong

Abstract

We compare three standard New Keynesian models differing only in their representations of monetary policy—the Optimal Timeless Rule, the original Taylor Rule and another with ‘interest rate smoothing’—with the aim of testing which if any can match the data according to the method of indirect inference. We find that the Optimal Timeless Rule performs the best, either with calibrated parameters or with estimated parameters. This model can also account for the widespread finding of apparent ‘Taylor Rules’ and smoothed interest rates in the data, even though neither of these represents the true policy.

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Bibliographic Info

Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 32 (2013)
Issue (Month): C ()
Pages: 113-123

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Handle: RePEc:eee:ecmode:v:32:y:2013:i:c:p:113-123

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

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Keywords: Identification; Monetary policy; Optimal Timeless Rule; Taylor Rules; Indirect inference; Wald statistic;

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Cited by:
  1. Cristi SPULBĂR & Cristian STANCIU & Mihai NIŢOI, 2011. "The Macroeconomic Performance of Monetary Policies. A Stochastic Simulation Based on the Taylor’s Rule," Journal of Knowledge Management, Economics and Information Technology, ScientificPapers.org, vol. 1(6), pages 15, October.
  2. Paul De Grauwe, 2012. "Lectures on Behavioral Macroeconomics," Economics Books, Princeton University Press, edition 1, volume 1, number 9891.

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