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Bernanke vs. Taylor: A Post Mortem (revised August 2014)

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  • W. Douglas McMillin

    ()

  • James S. Fackler

    ()

Abstract

Our analysis is intended to shed light on the issue of whether monetary policy contributed to the recent housing boom and bust. We have estimated and analyzed a model that allows a comparison between actual policy and several alternative Taylor Rules. When the Taylor Rule path was computed using revised data and the GDP deflator, we found a notable impact on key housing market variables, supporting Taylor’s critique of Fed policy. However the bulk of our evidence suggests that policy as it would have been conducted under our real-time Taylor Rules would not have had any significant impact on the housing market variables. This conclusion is robust with regard to the price index used as well as the relative weights used on the inflation and output gaps.

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Paper provided by Department of Economics, Louisiana State University in its series Departmental Working Papers with number 2013-07.

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Handle: RePEc:lsu:lsuwpp:2013-07

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  1. Uhlig, H.F.H.V.S., 1999. "What are the Effects of Monetary Policy on Output? Results from an Agnostic Identification Procedure," Discussion Paper 1999-28, Tilburg University, Center for Economic Research.
  2. Eric M. Leeper & Tao Zha, 2003. "Modest policy interventions," Working Paper 2003-24, Federal Reserve Bank of Atlanta.
  3. John V. Duca & Tao Wu, 2008. "Regulation and the neo-Wicksellian approach to monetary policy," Working Papers 0807, Federal Reserve Bank of Dallas.
  4. Matteo Iacoviello, 2005. "House Prices, Borrowing Constraints, and Monetary Policy in the Business Cycle," American Economic Review, American Economic Association, vol. 95(3), pages 739-764, June.
  5. Fackler, J.S. & Rogers, J.H., 1993. "Output, Inflation and Stabilization: A Counterfactual Analysis," Papers 3-93-4, Pennsylvania State - Department of Economics.
  6. Marek Jarocinski & Frank R. Smets, 2008. "House prices and the stance of monetary policy," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 339-366.
  7. Carlos Vargas-Silva, 2007. "Monetary policy and the U.S. housing market: A VAR analysis imposing sign restrictions," Working Papers 0705, Sam Houston State University, Department of Economics and International Business.
  8. Dufour, Jean-Marie, 1980. "Dummy variables and predictive tests for structural change," Economics Letters, Elsevier, vol. 6(3), pages 241-247.
  9. Olivier Jean Blanchard & Danny Quah, 1988. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," NBER Working Papers 2737, National Bureau of Economic Research, Inc.
  10. Duca, John V., 1996. "Deposit Deregulation and the Sensitivity of Housing," Journal of Housing Economics, Elsevier, vol. 5(3), pages 207-226, September.
  11. James S. Fackler & W. Douglas McMillin, 2011. "Inflation Forecast Targeting: An Alternative Approach to Estimating the Inflation-Output Variability Tradeoff," Southern Economic Journal, Southern Economic Association, vol. 78(2), pages 424-451, October.
  12. Del Negro, Marco & Otrok, Christopher, 2007. "99 Luftballons: Monetary policy and the house price boom across U.S. states," Journal of Monetary Economics, Elsevier, vol. 54(7), pages 1962-1985, October.
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