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Monetary policy rules based on real-time data

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  • Athanasios Orphanides

Abstract

In recent years, simple policy rules have received attention as a means to a more transparent and effective monetary policy. Often, however, the analysis is based on unrealistic assumptions about the timeliness of data availability. This permits rule specifications that are not operational and ignore difficulties associated with data revisions. This paper examines the magnitude of these informational problems using Taylor's rule as an example. I demonstrate that the real-time policy recommendations differ considerably from those obtained with the ex post revised data and are revised substantially even a year after the relevant quarter. Further, I show that estimated policy reaction functions obtained using the ex post revised data can yield misleading descriptions of historical policy. Using Federal Reserve staff forecasts I show that in the 1987-1992 period simple forward-looking specifications describe policy better than comparable Taylor-type specifications, a fact that is largely obscured when the analysis is based on the ex post revised data.

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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 1998-03.

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Date of creation: 1998
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Handle: RePEc:fip:fedgfe:1998-03

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Keywords: Monetary policy;

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  1. John C. Williams, 1999. "Simple rules for monetary policy," Finance and Economics Discussion Series 1999-12, Board of Governors of the Federal Reserve System (U.S.).
  2. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
  3. Dale W. Henderson & Warwick J. McKibbin, 1993. "A comparison of some basic monetary policy regimes for open economies: implications of different degrees of instrument adjustment and wage persistence," International Finance Discussion Papers 458, Board of Governors of the Federal Reserve System (U.S.).
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  1. Base de Dados
    by Angelo M. Fasolo in The Duke of Hazard on 2008-10-04 15:22:00
  2. Blogs review: The Monetary Regime and the drawbacks of NGDP targeting
    by ? in Bruegel blog on 2013-02-08 10:19:36
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