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Identification with Taylor Rules: A Critical Review

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John H. Cochrane

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Abstract

The parameters of the Taylor rule relating interest rates to inflation and other variables are not identified in new-Keynesian models. Thus, Taylor rule regressions cannot be used to argue that the Fed conquered inflation by moving from a "passive" to an "active" policy in the early 1980s.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13410.

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Date of creation: Sep 2007
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Handle: RePEc:nbr:nberwo:13410

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Find related papers by JEL classification:
E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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References listed on IDEAS
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  1. Alexei Onatski & Noah Williams, 2004. "Empirical and policy performance of a forward-looking monetary model," Proceedings, Federal Reserve Bank of San Francisco, issue Mar. [Downloadable!]
  2. Andreas Beyer & Roger E. A. Farmer, 2004. "On the Indeterminacy of New-Keynesian Economics," Computing in Economics and Finance 2004 152, Society for Computational Economics. [Downloadable!]
    Other versions:
  3. Minford, Patrick & Perugini, Francesco & Srinivasan, Naveen, 2001. "The Observational Equivalence of Taylor Rule and Taylor-Type Rules," CEPR Discussion Papers 2959, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  4. Richard Clarida & Jordi Gali & Mark Gertler, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December. [Downloadable!] (restricted)
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  5. Klein, Paul, 2000. "Using the generalized Schur form to solve a multivariate linear rational expectations model," Journal of Economic Dynamics and Control, Elsevier, vol. 24(10), pages 1405-1423, September. [Downloadable!] (restricted)
  6. Taylor, John B., 1999. "The robustness and efficiency of monetary policy rules as guidelines for interest rate setting by the European central bank," Journal of Monetary Economics, Elsevier, vol. 43(3), pages 655-679, June. [Downloadable!] (restricted)
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  7. Sims, Christopher A, 1994. "A Simple Model for Study of the Determination of the Price Level and the Interaction of Monetary and Fiscal Policy," Economic Theory, Springer, vol. 4(3), pages 381-99.
  8. Troy Davig & Eric M. Leeper, 2005. "Generalizing the Taylor Principle," NBER Working Papers 11874, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  9. John H. Cochrane, 2007. "Inflation Determination With Taylor Rules: A Critical Review," NBER Working Papers 13409, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  10. Frank Smets & Raf Wouters, 2003. "An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area," Journal of the European Economic Association, MIT Press, vol. 1(5), pages 1123-1175, 09. [Downloadable!] (restricted)
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  11. Peter N. Ireland, 2007. "Changes in the Federal Reserve's Inflation Target: Causes and Consequences," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(8), pages 1851-1882, December. [Downloadable!] (restricted)
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  12. Minford, Patrick & Perugini, Francesco & Srinivasan, Naveen, 2002. "Are interest rate regressions evidence for a Taylor rule?," Economics Letters, Elsevier, vol. 76(1), pages 145-150, June. [Downloadable!] (restricted)
  13. Clarida, Richard & Gali, Jordi & Gertler, Mark, 1998. "Monetary policy rules in practice Some international evidence," European Economic Review, Elsevier, vol. 42(6), pages 1033-1067, June. [Downloadable!] (restricted)
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  14. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-11, July. [Downloadable!] (restricted)
  15. Thomas A. Lubik & Frank Schorfheide, 2004. "Testing for Indeterminacy: An Application to U.S. Monetary Policy," American Economic Review, American Economic Association, vol. 94(1), pages 190-217, March. [Downloadable!] (restricted)
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  1. John H. Cochrane, 2007. "Inflation Determination With Taylor Rules: A Critical Review," NBER Working Papers 13409, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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