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Testing the Monetary Policy Rule in the US: a Reconsideration of the Fed’s Behaviour

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  • Minford, Patrick
  • Ou, Zhirong

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 C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7575.

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Date of creation: Nov 2009
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Handle: RePEc:cpr:ceprdp:7575

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Related research

Keywords: bootstrap simulation; indirect inference; Monetary policy; New Keynesian model; Taylor-type rules; the 'target rule'; VAR; Wald statistic;

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  1. William B. English & William R. Nelson & Brian P. Sack, 2002. "Interpreting the significance of lagged interest rate in estimated monetary policy rules," Finance and Economics Discussion Series 2002-24, Board of Governors of the Federal Reserve System (U.S.).
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Cited by:
  1. Itai Agur & Maria Demertzis, 2013. "Leaning Against the Wind and the Timing of Monetary Policy," IMF Working Papers 13/86, International Monetary Fund.
  2. Liu, Chunping & Minford, Patrick, 2014. "How important is the credit channel? An empirical study of the US banking crisis," Journal of Banking & Finance, Elsevier, vol. 41(C), pages 119-134.
  3. Liu, Chunping & Minford, Patrick, 2012. "Comparing behavioural and rational expectations for the US post-war economy," CEPR Discussion Papers 9132, C.E.P.R. Discussion Papers.

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