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Forecasting with the Taylor rule

Author

Listed:
  • Ivo Arnold
  • Evert Vrugt

Abstract

This article uses the Survey of Professional Forecasters (SPF) to investigate the added value of the Taylor rule in interest rate forecasting. We interpret the Taylor rule as a set of macroeconomic restrictions that can be imposed on each individual professional forecaster's predictions of interest rates, inflation and economic activity. We study whether conforming to these restrictions improves forecast accuracy. We find that using the Taylor rule improves forecasts four quarters ahead and conclude that the Taylor rule is a useful tool in forming expectations about future monetary policy.

Suggested Citation

  • Ivo Arnold & Evert Vrugt, 2012. "Forecasting with the Taylor rule," Applied Financial Economics, Taylor & Francis Journals, vol. 22(18), pages 1501-1510, September.
    • Handle: RePEc:taf:apfiec:v:22:y:2012:i:18:p:1501-1510
    DOI: 10.1080/09603107.2012.665592
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    References listed on IDEAS

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    1. Mr. Robert Tchaidze & Ms. Alina Carare, 2005. "The Use and Abuse of Taylor Rules: How Precisely Can We Estimate Them?," IMF Working Papers 2005/148, International Monetary Fund.
    2. Taylor, John B. & Williams, John C., 2010. "Simple and Robust Rules for Monetary Policy," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 15, pages 829-859, Elsevier.
    3. Dean Croushore, 1998. "Evaluating inflation forecasts," Working Papers 98-14, Federal Reserve Bank of Philadelphia.
    4. Hyeongwoo Kim & Ippei Fujiwara & Bruce E. Hansen & Masao Ogaki, 2015. "Purchasing Power Parity and the Taylor Rule," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 30(6), pages 874-903, September.
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