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The Taylor rule and house price uncertainty

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  • Bruce Morley
  • Qijia Wei

Abstract

The aim of this article is to determine whether house price uncertainty has been an important determinant of the Taylor rule-based interest rate during the years leading up to the financial crisis. A Generalized Autoregressive Conditional Heteroskedasticity (GARCH)-based specification has been used to produce a time-varying measure of volatility, and the results indicate that it has had a significant negative effect on the interest rate, but that its addition only produces a slightly better fit to the actual interest rate.

Suggested Citation

  • Bruce Morley & Qijia Wei, 2012. "The Taylor rule and house price uncertainty," Applied Economics Letters, Taylor & Francis Journals, vol. 19(15), pages 1449-1453, October.
    • Handle: RePEc:taf:apeclt:v:19:y:2012:i:15:p:1449-1453
    DOI: 10.1080/13504851.2011.633882
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    References listed on IDEAS

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    1. Semmler, Willi & Zhang, Wenlang, 2007. "Asset price volatility and monetary policy rules: A dynamic model and empirical evidence," Economic Modelling, Elsevier, vol. 24(3), pages 411-430, May.
    2. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-370, March.
    3. Frank Smets, 1997. "Financial-asset Prices and Monetary Policy: Theory and Evidence," RBA Annual Conference Volume (Discontinued), in: Philip Lowe (ed.),Monetary Policy and Inflation Targeting, Reserve Bank of Australia.
    4. Fuhrer, Jeffrey C, 1997. "Inflation/Output Variance Trade-Offs and Optimal Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(2), pages 214-234, May.
    5. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
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    Cited by:

    1. Trinil Arimurti & Bruce Morley, 2020. "Do Capital Flows Matter for Monetary Policy Setting in Inflation Targeting Economies?," JRFM, MDPI, vol. 13(7), pages 1-15, June.

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