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Understanding the deviation of Australian policy rate from the Taylor rule

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  • Kerry B Hudson
  • Joaquin Vespignani

Abstract

This investigation aims to explain and quantify the deviations of the Australian policy rate (set by Reserve Bank of Australia) from the Taylor Rule. A three-step econometric procedure designed to reflect the data-rich environment in which central banks operate is proposed using information for 229 macroeconomic series. This procedure can be applied to data for any economy with inflation targeting monetary rule. Our application with Australian data shows that approximately 65% of Australia’s policy rate deviation from the Taylor Rule can be explained systematically, with international factors and a domestic factor accounting for 41.9% and 22.5%, respectively, of the total variation in deviation from the rule.

Suggested Citation

  • Kerry B Hudson & Joaquin Vespignani, 2018. "Understanding the deviation of Australian policy rate from the Taylor rule," Applied Economics, Taylor & Francis Journals, vol. 50(9), pages 973-989, February.
    • Handle: RePEc:taf:applec:v:50:y:2018:i:9:p:973-989
    DOI: 10.1080/00036846.2017.1346367
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    References listed on IDEAS

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    1. Gordon de Brouwer & James O'Regan, 1997. "Evaluating Simple Monetary-policy Rules for Australia," RBA Annual Conference Volume (Discontinued), in: Philip Lowe (ed.),Monetary Policy and Inflation Targeting, Reserve Bank of Australia.
    2. Gordon de Brouwer, 1998. "Estimating Output Gaps," RBA Research Discussion Papers rdp9809, Reserve Bank of Australia.
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    Cited by:

    1. Fang‐Shuo Chang & Shiu‐Sheng Chen & Po‐Yuan Wang, 2020. "Politics and the UK's monetary policy," Scottish Journal of Political Economy, Scottish Economic Society, vol. 67(5), pages 486-522, November.

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