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Taylor Rule or Optimal Timeless Policy? Reconsidering the Fed's behaviour since 1982

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  • Minford, Patrick

    ()
    (Cardiff Business School)

  • Ou, Zhirong

    ()
    (Cardiff Business School)

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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Bibliographic 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: 37 pages
Date of creation: Sep 2009
Date of revision: May 2010
Handle: RePEc:cdf:wpaper:2009/19

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

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Cited by:
  1. Cristi SPULBĂR & Cristian STANCIU & Mihai NIŢOI, 2011. "The Macroeconomic Performance of Monetary Policies. A Stochastic Simulation Based on the Taylor’s Rule," Journal of Knowledge Management, Economics and Information Technology, ScientificPapers.org, vol. 1(6), pages 15, October.
  2. Paul De Grauwe, 2012. "Lectures on Behavioral Macroeconomics," Economics Books, Princeton University Press, edition 1, volume 1, number 9891.

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