Real-Time Historical Analysis of Monetary Policy Rules
AbstractThe 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 Taylorâ€™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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Bibliographic InfoPaper provided by Department of Economics, University of Houston in its series Working Papers with number 2013-140-17.
Date of creation: 20 May 2013
Date of revision:
Real-Time Data; Monetray Policy Rules; Taylor Rule;
Find related papers by JEL classification:
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-05-24 (All new papers)
- NEP-CBA-2013-05-24 (Central Banking)
- NEP-MAC-2013-05-24 (Macroeconomics)
- NEP-MON-2013-05-24 (Monetary Economics)
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