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Taylor Rule Revisited: from an Econometric Point of View

  • Claudia Kurz


    (University of Applied Sciences Mainz, Germany)

  • Jeong-Ryeol Kurz-Kim


    (Deutsche Bundesbank, Germany)

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    Based on a more realistic assumption, we modify the Taylor regression. The modified Taylor regression gives an explanation of why the (standard) Taylor regression is spurious (in the econometric sense, i.e. no stable relationship among the variables of interest) and, at the same time, a solution as to how central bank monetary policy can still be described by the Taylor rule. An empirical example using euro-area data confirms the compatibility of our modification with empirical data.

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    Article provided by Better Advances Press, Canada in its journal Review of Economics & Finance.

    Volume (Year): 1 (2011)
    Issue (Month): (June)
    Pages: 46-51

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    Handle: RePEc:bap:journl:110303
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    1. John B. Taylor, 1999. "A Historical Analysis of Monetary Policy Rules," NBER Chapters, in: Monetary Policy Rules, pages 319-348 National Bureau of Economic Research, Inc.
    2. 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.
    3. Andrews, Donald W K, 1993. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Econometrica, Econometric Society, vol. 61(4), pages 821-56, July.
    4. Clarida, Richard & Gali, Jordi & Gertler, Mark, 1998. "Monetary policy rules in practice Some international evidence," European Economic Review, Elsevier, vol. 42(6), pages 1033-1067, June.
    5. Robert J. Hodrick & Edward Prescott, 1981. "Post-War U.S. Business Cycles: An Empirical Investigation," Discussion Papers 451, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    6. Jon Faust & John H. Rogers & Jonathan H. Wright, 2001. "An empirical comparison of Bundesbank and ECB monetary policy rules," International Finance Discussion Papers 705, Board of Governors of the Federal Reserve System (U.S.).
    7. Gerlach-Kristen, Petra, 2003. "Interest rate reaction functions and the Taylor rule in the euro area," Working Paper Series 0258, European Central Bank.
    8. Peter C. B. Phillips & Bruce E. Hansen, 1990. "Statistical Inference in Instrumental Variables Regression with I(1) Processes," Review of Economic Studies, Oxford University Press, vol. 57(1), pages 99-125.
    9. Phillips, Peter C B & Ouliaris, S, 1990. "Asymptotic Properties of Residual Based Tests for Cointegration," Econometrica, Econometric Society, vol. 58(1), pages 165-93, January.
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