Markov Switching and the Taylor Principle
AbstractEarly research on the Taylor rule typically divided the data exogenously into pre-Volcker and Volcker-Greenspan subsamples. Â We contribute to the recent trend of endogenizing changes in monetary policy by estimating a real-time forward-looking Taylor rule with endogenous Markov switching coefficients and variance. The response of the interest rate to inflation is regime dependent, with the pre and post-Volcker samples containing monetary regimes where the Fed did and did not follow the Taylor principle. While the Fed consistently adhered to the Taylor principle before 1973 and after 1984, it followed the Taylor principle from 1975-1979 and did not follow the Taylor principle from 1980-1984. Â We also find that the Fed only responded to real economic activity during the states in which the Taylor principle held. Â Our results are consistent with the idea that exogenously dividing postwar monetary policy into pre-Volcker and post-Volcker samples misleading. The greatest qualitative difference between our results and recent research employing time varying parameters is that we find that the Fed did not adhere to the Taylor Principle during most of Paul Volckerâ€™s tenure, a finding which accords with the historical record of monetary policy.
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Bibliographic InfoPaper provided by Department of Economics, University of Houston in its series Working Papers with number 2013-219-06.
Date of creation: 05 Aug 2013
Date of revision:
Markov Switching; Taylor Principle; 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
- C24 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Truncated and Censored Models; Switching Regression Models
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-08-16 (All new papers)
- NEP-CBA-2013-08-16 (Central Banking)
- NEP-HIS-2013-08-16 (Business, Economic & Financial History)
- NEP-MAC-2013-08-16 (Macroeconomics)
- NEP-MON-2013-08-16 (Monetary Economics)
- NEP-SPO-2013-08-16 (Sports & Economics)
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