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Taylor Rules in the Quarterly Projection Model

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Author Info
Jamie Armour
Ben Fung
Dinah Maclean
Abstract

In recent years, there has been a lot of interest in Taylor-type rules. Evidence in the literature suggests that Taylor-type rules are optimal in a number of models and are fairly robust across different models. The reaction function in the Bank of Canada's Quarterly Projection Model (QPM) is an inflation-forecast-based (IFB) rule. A number of studies have suggested, however, that the optimality of IFB rules is very model-specific. Given this and concerns about model uncertainty, it seems logical to assess the performance of Taylor-type reaction functions in QPM. Therefore, we compare QPM's IFB rule with a simple Taylor rule as well as with two rules that include open-economy elements. Overall, our results suggest that Taylor-type rules do not perform well in QPM compared with the base-case IFB rule, since they are associated with significantly higher variabilities of inflation, output, and interest rates. However, of the Taylor-type rules considered, we find that a simple rule with a coefficient of 2 on the contemporaneous inflation gap (versus 0.5 in Taylor's original rule) and a coefficient of 0.5 on the output gap is the most appropriate. Furthermore, the gains from using open-economy rules seem to be limited.

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Paper provided by Bank of Canada in its series Working Papers with number 02-1.

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Length: 48 pages
Date of creation: 2002
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Handle: RePEc:bca:bocawp:02-1

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Related research
Keywords: Monetary policy framework; Uncertainty and monetary policy; Economic models;

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Find related papers by JEL classification:
E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Amano, Robert & Coletti, Don & Macklem, Tiff, 1999. "Monetary Rules When Economic Behaviour Changes," Working Papers 99-8, Bank of Canada. [Downloadable!]
    Other versions:
  2. Peter Isard & Douglas Laxton & Ann-Charlotte Eliasson, 1999. "Simple Monetary Policy Rules Under Model Uncertainty," International Tax and Public Finance, Springer, vol. 6(4), pages 537-577, November. [Downloadable!] (restricted)
    Other versions:
  3. Athanasios Orphanides, 2000. "The quest for prosperity without inflation," Working Paper Series 15, European Central Bank. [Downloadable!]
    Other versions:
  4. Armstrong, John & Black, Richard & Laxton, Douglas & Rose, David, 1998. "A robust method for simulating forward-looking models," Journal of Economic Dynamics and Control, Elsevier, vol. 22(4), pages 489-501, April. [Downloadable!] (restricted)
  5. Andrew Levin & Volker Wieland & John C. Williams, 1998. "Robustness of Simple Monetary Policy Rules under Model Uncertainty," NBER Working Papers 6570, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  6. Laurence Ball, 1997. "Efficient Rules for Monetary Policy," NBER Working Papers 5952, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  7. Svensson, L-E-O, 1997. "Inflation Targeting : Some Extensions," Papers 625, Stockholm - International Economic Studies.
    Other versions:
  8. Amano, Robert & Coletti , Don & Murchison , Stephen, 2000. "Empirical Estimation and the Quarterly Projection Model: An Example Focusing on the External Sector," Working Paper Series 104, Sveriges Riksbank (Central Bank of Sweden). [Downloadable!]
  9. Frank Smets, 2002. "Output gap uncertainty: Does it matter for the Taylor rule?," Empirical Economics, Springer, vol. 27(1), pages 113-129. [Downloadable!] (restricted)
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  10. Gert Peersman & Frank Smets, 1999. "Uncertainty and the Taylor rule in a simple model of the Euro-area economy," Proceedings, Federal Reserve Bank of San Francisco.
  11. Stephen Poloz & David Rose & Robert Tetlow, 1994. "The Bank of Canada's new Quarterly Projection Model (QPM): An introduction," Bank of Canada Review, Bank of Canada, vol. 1994(Autumn), pages 23-38. [Downloadable!]
  12. Murray, John & Mark Zelmer & Zahir Antia, 2000. "International Financial Crises and Flexible Exchange Rates: Some Policy Lessons from Canada," Technical Reports 88, Bank of Canada. [Downloadable!]
  13. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1.
  14. Sharon Kozicki, 1999. "How useful are Taylor rules for monetary policy?," Economic Review, Federal Reserve Bank of Kansas City, issue Q II, pages 5-33. [Downloadable!]
  15. Srour, Gabriel, 1999. "Inflation Targeting under Uncertainty," Technical Reports 85, Bank of Canada. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Kevin Clinton, 2006. "Wicksell at the Bank of Canada," Working Papers 1087, Queen's University, Department of Economics. [Downloadable!]
  2. Nicholas Rowe & David Tulk, 2003. "A Simple Test of Simple Rules: Can They Improve How Monetary Policy is Implemented with Inflation Targets?," Working Papers 03-31, Bank of Canada. [Downloadable!]
  3. Denise Côté & John Kuszczak & Jean-Paul Lam & Ying Liu & Pierre St-Amant, 2003. "A Comparison of Twelve Macroeconomic Models of the Canadian Economy," Technical Reports 94, Bank of Canada. [Downloadable!]
    Other versions:
  4. Denise Côté & John Kuszczak & Jean-Paul Lam & Ying Liu & Pierre St-Amant, 2002. "The Performance and Robustness of Simple Monetary Policy Rules in Models of the Canadian Economy," Technical Reports 92, Bank of Canada. [Downloadable!]
    Other versions:
  5. Gabriel Srour, 2003. "Some Notes on Monetary Policy Rules with Uncertainty," Working Papers 03-16, Bank of Canada. [Downloadable!]
  6. Scott Hendry & Wai-Ming Ho & Kevin Moran, 2003. "Simple Monetary Policy Rules in an Open-Economy, Limited-Participation Model," Working Papers 03-38, Bank of Canada. [Downloadable!]
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