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Real-Time Historical Analysis of Monetary Policy Rules

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  • Alex Nikolsko-Rzhevskyy

    ()
    (Lehigh University)

  • David Papell

    ()
    (University of Houston)

Abstract

The size of the output gap coefficient is the key determinant of whether quantitative easing since 2009 and continued near-zero interest rates can by justified by a Taylor rule. Fed Chair Ben Bernanke and Vice-Chair Janet Yellen have argued that John Taylor proposed a monetary policy rule with a larger output gap coefficient in his 1999 paper than in his 1993 paper, and have used this argument to justify negative prescribed interest rates in 2009-2010 and near-zero interest rates through 2015. While Taylor neither proposed nor advocated a different rule in 1999 than in 1993, he did not draw a distinction between the implications of the two rules. In accord with common practice at the time, Taylor used revised data. We show that, using real-time data available to policymakers (although not to Taylor when he wrote the paper), there is a sharp difference in the implications of rules with a smaller and a larger output gap coefficient. If John Taylor had been able to use real-time data in his 1999 paper, the importance of the distinction between Taylor’s original rule with a smaller output gap coefficient and other rules with a larger coefficient would have been evident much earlier.

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File URL: http://www.uh.edu/econpapers/RePEc/hou/wpaper/2013-140-17.pdf
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Bibliographic Info

Paper provided by Department of Economics, University of Houston in its series Working Papers with number 2013-140-17.

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Date of creation: 20 May 2013
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Handle: RePEc:hou:wpaper:2013-140-17

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Postal: Houston TX 77023
Web page: http://www.uh.edu/class/economics/
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Related research

Keywords: Real-Time Data; Monetray Policy Rules; Taylor Rule;

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  1. Athanasios Orphanides, 1998. "Monetary policy rules based on real-time data," Finance and Economics Discussion Series 1998-03, Board of Governors of the Federal Reserve System (U.S.).
  2. Nikolsko-Rzhevskyy, Alex & Papell, David H., 2012. "Taylor rules and the Great Inflation," Journal of Macroeconomics, Elsevier, vol. 34(4), pages 903-918.
  3. Alex Nikolsko-Rzhevskyy & David H. Papell, 2013. "Taylor's Rule Versus Taylor Rules," International Finance, Wiley Blackwell, vol. 16(1), pages 71-93, 02.
  4. Orphanides, Athanasios, 2003. "Historical monetary policy analysis and the Taylor rule," Journal of Monetary Economics, Elsevier, vol. 50(5), pages 983-1022, July.
  5. Orphanides, Athanasios, 2000. "The quest for prosperity without inflation," Working Paper Series 0015, European Central Bank.
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