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The influence of the Taylor rule on US monetary policy

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  • Pelin Ilbas

    ()
    (National Bank of Belgium)

  • Øistein Røisland

    ()
    (Norges Bank (Central Bank of Norway))

  • Tommy Sveen

    ()
    (BI Norwegian Business School)

Abstract

We analyze the influence of the Taylor rule on US monetary policy by estimating the policy preferences of the Fed within a DSGE framework. The policy preferences are represented by a standard loss function, extended with a term that represents the degree of reluctance to letting the interest rate deviate from the Taylor rule. The empirical support for the presence of a Taylor rule term in the policy preferences is strong and robust to alternative specifications of the loss function. Analyzing the Fed's monetary policy in the period 2001 - 2006, we find no support for a decreased weight on the Taylor rule, contrary to what has been argued in the literature. The large deviations from the Taylor rule in this period are due to large, negative demand-side shocks, and represent optimal deviations for a given weight on the Taylor rule.

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File URL: http://www.norges-bank.no/en/Published/Papers/Working-Papers/2013/WP-201304/
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Bibliographic Info

Paper provided by Norges Bank in its series Working Paper with number 2013/04.

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Length: 32 pages
Date of creation: 29 Jan 2013
Date of revision:
Handle: RePEc:bno:worpap:2013_04

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Keywords: Optimal monetary policy; Simple rules; Central bank preferences;

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