The Taylor rule: can it be supported by the data?
AbstractThe Taylor equation is a simple monetary policy rule that determines the Central Bank’s policy rate as a function of inflation and output. A significant body of literature verifies the consistency of the Taylor rule with the data. However, recently there has been a growing literature regarding the validity of the estimated parameters due to the non-stationarity of the interest rate. In this paper I test the consistency of the Taylor rule with the Greek data for the period 1996-2004. It appears that the data do not support the Taylor rule in the sense that they do not form a cointegration set of variables. Therefore, the estimated parameters should be considered fragile and the forecasting for the interest rate as a function of inflation and output should not be expected to be adequately consistent with the actual data.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 1650.
Date of creation: 31 Aug 2006
Date of revision:
Taylor rule; Monetary policy; Central bank; EMU; Greece;
Find related papers by JEL classification:
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
- 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-2007-02-10 (All new papers)
- NEP-FOR-2007-02-10 (Forecasting)
- NEP-MAC-2007-02-10 (Macroeconomics)
- NEP-MON-2007-02-10 (Monetary Economics)
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