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An empirical investigation of the Taylor curve

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Author Info

  • Olson, Eric
  • Enders, Walter
  • Wohar, Mark E.

Abstract

Taylor (1979) posited that a central bank faces a tradeoff between the volatility of the output gap and volatility of inflation; this trade-off has become known as the Taylor curve. Thus, the Taylor curve necessitates that the correlation between the volatilities of inflation and the output gap be non-positive for optimal monetary policy. Friedman (2006) challenged Chatterjee (2002) and Taylor’s (2006) view that the Taylor curve may be used as a policy menu from which the central bank may choose the level of inflation and output gap volatilities. To better understand the issue, we take an in depth look at the correlation between the second moments of inflation and the output gap through the lens of the Taylor curve. Our results reveal that macroeconomic performance is superior in time periods in which the Taylor curve relationship holds.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Macroeconomics.

Volume (Year): 34 (2012)
Issue (Month): 2 ()
Pages: 380-390

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Handle: RePEc:eee:jmacro:v:34:y:2012:i:2:p:380-390

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Web page: http://www.elsevier.com/locate/inca/622617

Related research

Keywords: Monetary policy; Taylor rule; Time-varying parameters; Inflation targeting;

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References

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  1. James D. Hamilton, 2000. "What is an Oil Shock?," NBER Working Papers 7755, National Bureau of Economic Research, Inc.
  2. Stephen G. Cecchetti & Alfonso Flores-Lagunes & Stefan Krause, 2006. "Has Monetary Policy become more Efficient? a Cross-Country Analysis," Economic Journal, Royal Economic Society, vol. 116(511), pages 408-433, 04.
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  9. Lee, Jim, 1999. "The inflation and output variability tradeoff: evidence from a Garch model," Economics Letters, Elsevier, vol. 62(1), pages 63-67, January.
  10. Bunzel, Helle & Enders, Walter, 2005. "The Taylor Rule and 'Opportunistic' Monetary Policy," Staff General Research Papers 12301, Iowa State University, Department of Economics.
  11. Jim Lee, 2002. "The Inflation-Output Variability Tradeoff and Monetary Policy: Evidence from a GARCH Model," Southern Economic Journal, Southern Economic Association, vol. 69(1), pages 175-188, July.
  12. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," CEPR Discussion Papers 1908, C.E.P.R. Discussion Papers.
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  16. repec:fip:fedgsq:y:2010:x:4 is not listed on IDEAS
  17. Frederic S. Mishkin & Klaus Schmidt-Hebbel, 2007. "Does Inflation Targeting Make a Difference?," NBER Working Papers 12876, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Baaziz, Yosra & Labidi, Moez & Lahiani, Amine, 2013. "Does the South African Reserve Bank follow a nonlinear interest rate reaction function?," Economic Modelling, Elsevier, vol. 35(C), pages 272-282.
  2. Eliphas Ndou & Nombulelo Gumata & Mthuli Ncube & Eric Olson, 2013. "Working Paper 189 - An Empirical Investigation of the Taylor Curve in South Africa," Working Paper Series 992, African Development Bank.

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