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The effects of Minsky moment and stock prices on the US Taylor Rule

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  • Paradiso, Antonio
  • Rao, B. Bhaskara

Abstract

This paper estimates the US Taylor rule for the period 1997 – 2010, with monthly data, a period characterized by two recessions and asset markets turbulences. Its novelties are that, firstly, we follow Weise and Barbera (2009) and include in the Taylor rule credit spreads (a variable which captures the so-called Minsky Moment) and a modified Wicksellian neutral interest rate. Secondly, we also include a variable to capture the effects of stock price movements. Thirdly, we find that all the variables in the US Taylor rule are I(1) in levels. Therefore, we estimate this equation with the time series methods of unit roots and cointegration, which is perhaps a novelty for the US Taylor rule. We find that there is a well defined cointegrating equation for the US Taylor rule embodying Wicksellian-Minsky effects and stock market movements. Secondly, the Federal Reserve system seems to give relatively a much larger weight to the objective of controlling inflation than to output and unemployment.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 27840.

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Date of creation: 02 Jan 2011
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Handle: RePEc:pra:mprapa:27840

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Keywords: Taylor rule; Minsky Moment; Wicksellian interest rate; Stock prices; Cointegration;

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  1. Richard Clarida & Jordi Gali & Mark Gertler, 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," NBER Working Papers 6442, National Bureau of Economic Research, Inc.
  2. Athanasios Orphanides & John C. Williams, 2002. "Robust monetary policy rules with unknown natural rates," Working Paper Series 2003-01, Federal Reserve Bank of San Francisco.
  3. Richard Clarida & Jordi Gali & Mark Gertler, 1997. "Monetary Policy Rules in Practice: Some International Evidence," NBER Working Papers 6254, National Bureau of Economic Research, Inc.
  4. Jordi Galí & Mark Gertler, 1998. "Inflation dynamics: A structural econometric analysis," Economics Working Papers 341, Department of Economics and Business, Universitat Pompeu Fabra.
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  10. Glenn D. Rudebusch, 2010. "The Fed's exit strategy for monetary policy," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue jun14.
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  13. Ansgar Belke & Thorsten Polleit, 2006. "How the ECB and the US Fed Set Interest Rates," Diskussionspapiere aus dem Institut für Volkswirtschaftslehre der Universität Hohenheim 269/2006, Department of Economics, University of Hohenheim, Germany.
  14. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
  15. Rao, B. Bhaskara & Singh, Rup & Kumar, Saten, 2008. "Do we need time series econometrics?," MPRA Paper 6627, University Library of Munich, Germany.
  16. Inder, Brett, 1993. "Estimating long-run relationships in economics : A comparison of different approaches," Journal of Econometrics, Elsevier, vol. 57(1-3), pages 53-68.
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