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

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

Abstract

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.

Suggested Citation

  • Fernandez, Adriana Z. & Koenig, Evan F. & Nikolsko-Rzhevskyy, Alex, 2010. "Can alternative Taylor-rule specifications describe Federal Reserve policy decisions?," Journal of Policy Modeling, Elsevier, vol. 32(6), pages 733-757, November.
  • Handle: RePEc:eee:jpolmo:v:32:y::i:6:p:733-757
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Hoffmann, Andreas, 2013. "Did the Fed and ECB react asymmetrically with respect to asset market developments?," Journal of Policy Modeling, Elsevier, vol. 35(2), pages 197-211.
    2. Lafuente, Juan A. & Pérez, Rafaela & Ruiz, Jesús, 2014. "Time-varying inflation targeting after the nineties," International Review of Economics & Finance, Elsevier, vol. 29(C), pages 400-408.
    3. repec:bla:reviec:v:25:y:2017:i:1:p:165-194 is not listed on IDEAS
    4. Moccero, Diego & Gnabo, Jean-Yves, 2015. "The risk management approach to monetary policy, nonlinearity and aggressiveness: the case of the US Fed," Working Paper Series 1792, European Central Bank.
    5. Gustavo Nicolás Páez, 2015. "Prediciendo decisiones de agentes económicos: ¿Cómo determina el Banco de la República de Colombia la tasa de interés?," DOCUMENTOS CEDE 012567, UNIVERSIDAD DE LOS ANDES-CEDE.
    6. Gnabo, Jean-Yves & Moccero, Diego Nicolas, 2015. "Risk management, nonlinearity and aggressiveness in monetary policy: The case of the US Fed," Journal of Banking & Finance, Elsevier, vol. 55(C), pages 281-294.
    7. Seip, Knut L. & McNown, Robert, 2013. "Monetary policy and stability during six periods in US economic history: 1959–2008: a novel, nonlinear monetary policy rule," Journal of Policy Modeling, Elsevier, vol. 35(2), pages 307-325.
    8. Jiranyakul, Komain, 2017. "How Does the Policy Rate Respond to Output and Prices in Thailand?," MPRA Paper 82050, University Library of Munich, Germany.

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