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The Observational Equivalence of Taylor Rule and Taylor-Type Rules

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  • Minford, Patrick
  • Perugini, Francesco
  • Srinivasan, Naveen

Abstract

In the past few years the view has commonly been expressed that central banks follow `Taylor Rules' (as first promulgated by Henderson and McKibbin (1993)). We show that the appearance of such an interest rate rule – a ‘pseudo-Taylor rule’ – can be created by a standard macro model in which actually a money supply rule is operating with no interest rate feedback – i.e, where there is in fact no Taylor rule operating at all. Hence an interest equation does not identify a (structural) Taylor rule; a Taylor rule and a pseudo-rule, though corresponding to different structural models, are ‘observationally equivalent’ to use the expression coined by Thomas Sargent (1976). It remains an open question whether Taylor rules or money supply rules are appropriate from a welfare viewpoint.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2959.

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Date of creation: Sep 2001
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Handle: RePEc:cpr:ceprdp:2959

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Keywords: monetary policy rules; observational equivalence;

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Cited by:
  1. Duca, John V. & VanHoose, David D., 2004. "Recent developments in understanding the demand for money," Journal of Economics and Business, Elsevier, vol. 56(4), pages 247-272.
  2. John H. Cochrane, 2011. "Determinacy and Identification with Taylor Rules," Journal of Political Economy, University of Chicago Press, vol. 119(3), pages 565 - 615.
  3. David D. VanHoose, 2004. "The New Open Economy Macroeconomics: A Critical Appraisal," Open Economies Review, Springer, vol. 15(2), pages 193-215, 04.
  4. Minford, Patrick & Perugini, Francesco & Srinivasan, Naveen, 2002. "Are interest rate regressions evidence for a Taylor rule?," Economics Letters, Elsevier, vol. 76(1), pages 145-150, June.

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