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Evaluating the Taylor Principle Over the Distribution of the Interest Rate: Evidence from the US, UK and Japan

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Author Info
Paul Mizen (University of Nottingham)
Tae-Hwan Kim (University of Nottingham)
Alan Thanaset (University of Nottingham)

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Abstract

Support for the Taylor principle is considerable but the focus of empirical investigation has been on estimated coefficients at the mean of the interest rate distribution. We offer a new approach that estimates the response of interest rates to inflation and the output gap at various points (quantiles) on the conditional distribution corresponding to different levels of interest rates. We find support for the Taylor principle at all but low rates in normal times for the US and the UK, but an increasingly aggressive (nonlinear) response to inflation as rates increase. This is robust to the inflation horizon, instrument choice and use of a real time output gap data. In abnormal times, described by events in Japan, we find strong support for the Taylor principle, and increasing aggression to inflation when rates increase. We confirm that increasing aggression towards inflation can be observed as interest rates approach zero. The results have implications for the modeling of economies when inflation is very low, and provides some insights into Japanese monetary policy in particular

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Paper provided by Money Macro and Finance Research Group in its series Money Macro and Finance (MMF) Research Group Conference 2006 with number 51.

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Date of creation: 02 Feb 2007
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Handle: RePEc:mmf:mmfc06:51

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Related research
Keywords: Taylor Principle; policy rules; quantile regression; low inflation; Japan;

Find related papers by JEL classification:
E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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