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The Use and Abuse of Taylor Rules: How precisely can we estimate them?

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  • Robert Tchaidze
  • Alina Carare

Abstract

This paper surveys the economic literature on simple policy rules and analyzes econometric methods used to estimate them, emphasizing effects of model misspecification. We draw attention to inconsistencies in evaluation of the rules and implications for policy advice, which is commonly done based on benchmark rules that could be improperly estimated, or selected for a wrong reason. We simulate a simple macroeconomic model with an interest rate obtained from a simple policy reaction function similar to Taylor (1993). We estimate different versions of the simple policy rule, using the simulated data. Estimations document illusionary presence of extra variables, such as lagged interest rate, output gap growth, and inflation differential; or claim the policy function to be forward looking. Length of the sample or ignorance of real time data errors do not seem to have significant impact on the results.

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Bibliographic Info

Paper provided by Econometric Society in its series Econometric Society 2004 Latin American Meetings with number 132.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:latm04:132

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Keywords: monetary policy rules; central bank; monetary policy; Taylor rules;

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References

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Cited by:
  1. M. Frömmel & G. Garabedian & F. Schobert, 2009. "Monetary Policy Rules in Central and Eastern European Countries: Does the Exchange Rate Matter?," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 09/611, Ghent University, Faculty of Economics and Business Administration.
  2. Kai D. Schmid, 2010. "Medium-run macrodynamics and the consensus view of stabilization policy," Diskussionspapiere aus dem Institut für Volkswirtschaftslehre der Universität Hohenheim 322/2010, Department of Economics, University of Hohenheim, Germany.
  3. Cinzia Alcidi & Alessandro Flamini & Andrea Fracasso, 2011. "Policy Regime Changes, Judgment and Taylor rules in the Greenspan Era," Economica, London School of Economics and Political Science, vol. 78(309), pages 89-107, January.
  4. Minford, Patrick & Ou, Zhirong & Wickens, Michael, 2012. "Revisiting the Great Moderation: policy or luck?," Cardiff Economics Working Papers E2012/9, Cardiff University, Cardiff Business School, Economics Section, revised Apr 2014.
  5. Ronny Mazzocchi, 2013. "Monetary Policy when the NAIRI is unknown: The Fed and the Great Deviation," DEM Discussion Papers 2013/16, Department of Economics and Management.

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