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The relative performance of alternative Taylor rule specifications

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

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. A second-order partial adjustment version of the Koenig (2004a) model performs consistently better than alternative specifications. Key features of this rule are the partial adjustment of the federal funds rate toward an equilibrium rate that depends on the unemployment rate and forward-looking inflation measures.

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Article provided by Federal Reserve Bank of Dallas in its journal Staff Papers.

Volume (Year): (2008)
Issue (Month): Jun ()
Pages:

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Handle: RePEc:fip:feddst:y:2008:i:jun:n:6
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