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Are Taylor-Based Monetary Policy Rules Forward-Looking?. An Investigation Using Superexogeneity Tests

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  • SOOREEA, Rajeev

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Abstract

Unlike previous studies which use statistical break tests to analyze the forward-lookingness of monetary policy rules, this study proposes the methodology that if the parameters of the Taylor rule change when the mechanism generating inflation changes, that is the Lucas critique applies, then inflation is not superexogenous for the parameters of the Taylor rule. In this case where superexogeneity fails, the rule is forward-looking. However, although the results indicate that the volatility of inflation (captured by a discrete heteroskedastic variance model of regime shifts) reduced by almost 50 percent, we fail to reject the null that inflation is superexogenous to the parameters of the Taylor rule. This implies that there is no evidence that Taylor-based monetary policy rules are forward-looking.

Suggested Citation

  • SOOREEA, Rajeev, 2007. "Are Taylor-Based Monetary Policy Rules Forward-Looking?. An Investigation Using Superexogeneity Tests," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 7(2), pages 87-94.
  • Handle: RePEc:eaa:aeinde:v:7:y:2007:i:2_7
    as

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    References listed on IDEAS

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    More about this item

    Keywords

    Taylor Rules; Forward-looking; Superexogeneity Tests;

    JEL classification:

    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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