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Can alternative Taylor-rule specifications describe Federal Reserve policy decisions?

  • Fernandez, Adriana Z.
  • Koenig, Evan F.
  • Nikolsko-Rzhevskyy, Alex

We look at how well several alternative Taylor-rule specifications describe Federal Reserve policy decisions in real time, using the newly developed Giacomini and Rossi (2007) test for non-nested model selection in the presence of (possible) parameter instability. Further, we isolate those Taylor-rule features that are most important for achieving relatively strong real-time performance. Key features of our preferred rule, which is robust to changing economic conditions, are the partial adjustment of the federal funds rate toward an equilibrium rate that depends on the unemployment rate and forward-looking inflation measures. We conclude by presenting an empirical application to show the policy relevance of our preferred rule in the context of the 2008-2009 recession.

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Article provided by Elsevier in its journal Journal of Policy Modeling.

Volume (Year): 32 (2010)
Issue (Month): 6 (November)
Pages: 733-757

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Handle: RePEc:eee:jpolmo:v:32:y::i:6:p:733-757
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