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Testing the Monetary Policy Rule in the US: A Reconsideration of the Fed's Behaviour

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Author Info
Minford, Patrick () (Cardiff Business School)
Ou, Zhirong () (Cardiff Business School)

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Abstract

We calibrate a standard New Keynesian model with three alternative representations of monetary policy - an optimal timeless rule, a 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 only model version that fails to be strongly rejected is the optimal timeless rule. Furthermore this version can also account for the widespread finding of apparent 'Taylor rules' and 'interest rate smoothing' in the data, even though neither represents the true monetary policy

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File URL: http://www.cardiff.ac.uk/carbs/econ/workingpapers/papers/E2009_19.pdf
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Publisher Info
Paper provided by Cardiff University, Cardiff Business School, Economics Section in its series Cardiff Economics Working Papers with number E2009/19.

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Length: 50 pages
Date of creation: Sep 2009
Date of revision: Oct 2009
Handle: RePEc:cdf:wpaper:2009/19

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Related research
Keywords: Monetary policy; Kew Keynesian model; the 'target rule'; Taylor-type rules; Bootstrap simulation; VAR; Indirect inference; Wald statistic;

Find related papers by JEL classification:
E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian
E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation
E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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This page was last updated on 2009-11-25.

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