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``Taylored'' Rules. Does One Fit All?

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Author Info

  • Cinzia Alcidi

    ()
    (Graduate Institute of International Studies, Geneva)

  • Alessandro Flamini

    ()
    (Keele University, Centre for Economic Research)

  • Andrea Fracasso

    ()
    (Graduate Institute of International Studies, Geneva)

Abstract

Modern monetary policymakers consider a huge amount of information in their evaluation of events and contingencies. However, most research on monetary policy relies on simple rules, and one relevant underpinning for this choice is the good empirical fit of the Taylor rule. This paper challenges the solidness of this foundation. We model the Federal Reserve reaction function during the Greenspan tenure as a Logistic Smoothing Transition Regime model in which a series of economically meaningful transition variables drive the transition across monetary regimes and allow the coefficients of the rule to change over time. We argue that estimated linear rules are weighted averages of the actual rules working in the diverse monetary regimes, where the weights merely reflect the length and not necessarily the relevance of the regimes. Thus, the actual presence of finer monetary policy regimes corrupts the general predictive and descriptive power of linear Taylor-type rules.

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Bibliographic Info

Paper provided by Centre for Economic Research, Keele University in its series Keele Economics Research Papers with number KERP 2007/06.

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Length: 32 pages
Date of creation: Apr 2005
Date of revision: Mar 2007
Handle: RePEc:kee:kerpuk:2007/06

Note: Alcidi gratefully acknowledges the financial support of the NCCR-FINRISK research program.
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Postal: Department of Economics, University of Keele, Keele, Staffordshire, ST5 5BG - United Kingdom
Phone: +44 (0)1782 584581
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Web page: http://www.keele.ac.uk/depts/ec/cer/
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Postal: Centre for Economic Research, Research Institute for Public Policy and Management, Keele University, Staffordshire ST5 5BG - United Kingdom
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Web: http://www.keele.ac.uk/depts/ec/cer/pubs_kerps.htm

Related research

Keywords: Judgement; LSTR; Monetary Policy Regime; Risk Management; Taylor Rule.;

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