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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)

Additional information is available for the following registered author(s):

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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Publisher 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
Fax: +44 (0)1782 717577
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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

For technical questions regarding this item, or to correct its listing, contact: (Martin E. Diedrich).

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

Find related papers by JEL classification:
E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

This paper has been announced in the following NEP Reports:

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Jan Wenzelburger & Hans Gersbach, 2007. "Sophistication in Risk Management, Bank Equity, and Stability," Keele Economics Research Papers KERP 2007/08, Centre for Economic Research, Keele University. [Downloadable!]
    Other versions:
  2. Jonathan P Thomas & Tim Worrall, 2007. "Dynamic Relational Contracts with Consumption Constraints," Keele Economics Research Papers KERP 2007/16, Centre for Economic Research, Keele University. [Downloadable!]
  3. Christopher Martin & Costas Milas, 2007. "Monetary Policy and the Hybrid Phillips Curve," Keele Economics Research Papers KERP 2007/12, Centre for Economic Research, Keele University. [Downloadable!]
    Other versions:
  4. Sotiris Karkalakos, 2007. "Trade, industrial location and environmental consciousness," Keele Economics Research Papers KERP 2007/15, Centre for Economic Research, Keele University. [Downloadable!]
  5. Jan Wenzelburger & Volker Böhm & Thorsten Pampel, 2007. "On the Stability of Balanced Growth," Keele Economics Research Papers KERP 2007/09, Centre for Economic Research, Keele University. [Downloadable!]
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