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Testing for Stabilizing Monetary Policy Rules: How Robust to Alternative Specifications?

  • Carey Kevin

    ()

    (American University)

A common hypothesis of interest in estimated Taylor rules is whether the Federal Funds rate increases more than one-for-one with inflation; a rule with this characteristic is described as stabilizing. This paper discusses the interaction of this hypothesis with the widespread use of a partial adjustment model, in the context of sub-sample stability and robustness to the assumed exclusion of the long bond rate. Estimated rules display sharply different behavior in the 1980s versus the 1990s, and the degree of inertia -- on which the calculated policy response depends -- rises to implausibly high levels in the 1990s. The rising inertia sharpens the non-linearity of the model, imparting fragility to the stabilization inference. Long bond inclusion mitigates these problems, but alternatives to partial adjustment, with a more flexible approach to autocorrelation, also show promise.

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Article provided by De Gruyter in its journal The B.E. Journal of Macroeconomics.

Volume (Year): 1 (2001)
Issue (Month): 1 (September)
Pages: 118-118

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Handle: RePEc:bpj:bejmac:v:topics.1:y:2001:i:1:n:3
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  1. Kiefer, Nicholas M. & Bunzel, Helle & Vogelsang, Timothy & Vogelsang, Timothy & Bunzel, Helle, 2000. "Simple Robust Testing of Regression Hypotheses," Staff General Research Papers Archive 1832, Iowa State University, Department of Economics.
  2. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," CEPR Discussion Papers 1908, C.E.P.R. Discussion Papers.
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  7. Sharon Kozicki, 1999. "How useful are Taylor rules for monetary policy?," Economic Review, Federal Reserve Bank of Kansas City, issue Q II, pages 5-33.
  8. Bennett T. McCallum, 1994. "Monetary Policy and the Term Structure of Interest Rates," NBER Working Papers 4938, National Bureau of Economic Research, Inc.
  9. Hsu, Chiente & Kugler, Peter, 1997. "The Revival of the Expectations Hypothesis of the US Term Structure of Interest Rates," Economics Letters, Elsevier, vol. 55(1), pages 115-120, August.
  10. Michael Woodford, 1994. "Nonstandard Indicators for Monetary Policy: Can Their Usefulness Be Judged from Forecasting Regressions?," NBER Chapters, in: Monetary Policy, pages 95-115 National Bureau of Economic Research, Inc.
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