Estimating a Taylor Rule for New Zealand with a time-varying neutral real rate

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Estimating a Taylor Rule for New Zealand with a time-varying neutral real rate

Author Info

L Christopher Plantier
Dean Scrimgeour (Reserve Bank of New Zealand)

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Abstract

Many critics of the Taylor rule claim that it is inferior to inflation forecast based (IFB) rules because it is not forward-looking, is not aggressive enough, and because of uncertainty surrounding the output gap. Nevertheless, the Taylor rule serves a constructive purpose because it abstracts from the Bank's macroeconomic model, FPS, and its performance is robust across various economic models. The Taylor rule thus provides a useful cross-check to the IFB rule, whose recommendations necessarily rely on a particular model structure, its dynamics and specific judgements over the forecast horizon. Additionally, this paper contends that any interest rate rule or model must account for the fall in the ex-ante real interest rate and the non-stationarity of short-term rates in New Zealand. We show how the neutral real interest rate (NRR) in the Taylor rule drifts downward since the second quarter of 1988, and explain why this presents additional real-time difficulties for the Taylor rule.

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Paper provided by Reserve Bank of New Zealand in its series Reserve Bank of New Zealand Discussion Paper Series with number DP2002/06.

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Length: 38p
Date of creation: May 2002
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Handle: RePEc:nzb:nzbdps:2002/06

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Find related papers by JEL classification:
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

This paper has been announced in the following NEP Reports:

NEP-ALL-2003-11-30 (All new papers)
NEP-MON-2003-11-30 (Monetary Economics)
NEP-RMG-2003-11-30 (Risk Management)

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