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Frequency Dependence in a Real-Time Monetary Policy Rule

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  • Richard A. Ashley
  • Kwok Ping Tsang
  • Randal J. Verbrugge
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    Abstract

    We estimate a monetary policy rule for the US allowing for possible frequency de- pendence - i.e., allowing the central bank to respond differently to persistent innovations than to transitory innovations, in both the real-time unemployment rate and the real-time inflation rate. The estimation method we use is flexible, and requires no strong a priori as- sumptions on the pattern of frequency dependence or on the nature of the data-generating process. It also allows for possible feedback in the relationship. As suggested by theory, our results convincingly reject linearity in the monetary policy rule in the sense that the coefficients in the monetary policy rule are found to be frequency dependent: the response depends on the persistence of a fluctuation in unemployment or inflation. Our approach also provides useful insights into how the central banks monetary policy rule has varied over time.

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    File URL: ftp://repec.econ.vt.edu/Papers/Ashley/freq_dependent_realtime_monetary_policy.pdf
    File Function: First version, 2013
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    Bibliographic Info

    Paper provided by Virginia Polytechnic Institute and State University, Department of Economics in its series Working Papers with number e07-41.

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    Length: 36 pages
    Date of creation: 2013
    Date of revision:
    Handle: RePEc:vpi:wpaper:e07-41

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    Related research

    Keywords: Taylor rule; frequency dependence; spectral regression; real-time data;

    References

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    1. Mork, Knut Anton, 1989. "Oil and Macroeconomy When Prices Go Up and Down: An Extension of Hamilton's Results," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 740-44, June.
    2. Hamilton, James D., 1996. "This is what happened to the oil price-macroeconomy relationship," Journal of Monetary Economics, Elsevier, vol. 38(2), pages 215-220, October.
    3. Kiseok Lee & Shawn Ni & Ronald A. Ratti, 1995. "Oil Shocks and the Macroeconomy: The Role of Price Variability," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 39-56.
    4. R. F. Engle, 1972. "Band Spectrum Regressions," Working papers 96, Massachusetts Institute of Technology (MIT), Department of Economics.
    5. Lutz Kilian, 2009. "Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply Shocks in the Crude Oil Market," American Economic Review, American Economic Association, vol. 99(3), pages 1053-69, June.
    6. James D. Hamilton, 2000. "What is an Oil Shock?," NBER Working Papers 7755, National Bureau of Economic Research, Inc.
    7. Hooker, Mark A., 1996. "What happened to the oil price-macroeconomy relationship?," Journal of Monetary Economics, Elsevier, vol. 38(2), pages 195-213, October.
    8. Hamilton, James D, 1983. "Oil and the Macroeconomy since World War II," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 228-48, April.
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    Cited by:
    1. Richard A. Ashley & Guo Li, 2013. "Re-Examining the Impact of Housing Wealth and Stock Wealth on Household Spending: Does Persistence in Wealth Changes Matter?," Working Papers e07-38, Virginia Polytechnic Institute and State University, Department of Economics.
    2. repec:vpi:wpaper:e07-42 is not listed on IDEAS

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