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Forecasting with the Taylor rule

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  • 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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    File URL: http://hdl.handle.net/10.1080/09603107.2012.665592
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    References listed on IDEAS

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    1. Dean Croushore, 1998. "Evaluating inflation forecasts," Working Papers 98-14, Federal Reserve Bank of Philadelphia.
    2. Robert Tchaidze & Alina Carare, 2004. "The Use and Abuse of Taylor Rules: How precisely can we estimate them?," Econometric Society 2004 Latin American Meetings 132, Econometric Society.
    3. 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.
    4. 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.
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