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Implicit Quantile Preferences of the Fed and the Taylor Rule

Author

Listed:
  • Gabriel Montes-Rojas

    (IIEP-UBA/CONICET)

  • Fernando Toledo

    (UNLP)

  • Nicolás Bertholet

    (UBA-IIEP)

  • Kevin Corfield

    (UBA)

Abstract

We study optimal monetary policy when a central bank maximizes a quantile utility objective rather than expected utility. In our framework, the central bank’s risk attitude is indexed by the quantile index level, providing a transparent mapping between hawkish/dovish stances and attention to adverse macroeconomic realizations. We formulate the infinite-horizon problem using a Bellman equation with the quantile operator. Implementing a Euler-equation approach, we get Taylor-rule-type reaction functions. Using an indirect inference approach, we derive an implicit quantile index of central bank risk aversion. An empirical implementation for the US is outlined based on reduced-form laws of motion with conditional heteroskedasticity, enabling estimation of the new monetary policy rule and its dependence on the Fed risk attitudes. The results reveal that the Fed has mostly a dovish-type behavior but with some periods of hawkish attitudes.

Suggested Citation

  • Gabriel Montes-Rojas & Fernando Toledo & Nicolás Bertholet & Kevin Corfield, 2026. "Implicit Quantile Preferences of the Fed and the Taylor Rule," Working Papers 384, Red Nacional de Investigadores en Economía (RedNIE).
    • Handle: RePEc:aoz:wpaper:384
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    References listed on IDEAS

    as
    1. Timothy Hills & Taisuke Nakata & Takeki Sunakawa, 2021. "A Promised Value Approach to Optimal Monetary Policy," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 83(1), pages 176-198, February.
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    Keywords

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    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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