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Financial Crisis, Taylor Rule and the Fed

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  • Saten Kumar

    () (Department of Economics, Faculty of Business and Law, Auckland University of Technology)

Abstract

We investigate how the Federal Reserve (Fed) hit the zero lower bound (ZLB) interest rate while operating under a Taylor-type policy rule. We estimate a reaction function and the results indicate that during the crisis Fed increased the weight on output without also increasing the weight on inflation led them to hit the ZLB.

Suggested Citation

  • Saten Kumar, 2014. "Financial Crisis, Taylor Rule and the Fed," Working Papers 2014-02, Auckland University of Technology, Department of Economics.
  • Handle: RePEc:aut:wpaper:201402
    as

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    File URL: http://www.aut.ac.nz/__data/assets/pdf_file/0004/452578/Economics-WP-2014-02.pdf
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    References listed on IDEAS

    as
    1. Carrion-i-Silvestre, Josep Lluís & Kim, Dukpa & Perron, Pierre, 2009. "Gls-Based Unit Root Tests With Multiple Structural Breaks Under Both The Null And The Alternative Hypotheses," Econometric Theory, Cambridge University Press, vol. 25(06), pages 1754-1792, December.
    2. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-1054, July.
    3. Svensson, Lars E. O., 1997. "Inflation forecast targeting: Implementing and monitoring inflation targets," European Economic Review, Elsevier, vol. 41(6), pages 1111-1146, June.
    4. William T. Gavin & Benjamin D. Keen, 2012. "The zero lower bound and the dual mandate," Working Papers 2012-026, Federal Reserve Bank of St. Louis.
    5. Elliott, Graham, 1999. "Efficient Tests for a Unit Root When the Initial Observation Is Drawn from Its Unconditional Distribution," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(3), pages 767-783, August.
    6. Clarida, Richard & Gali, Jordi & Gertler, Mark, 1998. "Monetary policy rules in practice Some international evidence," European Economic Review, Elsevier, vol. 42(6), pages 1033-1067, June.
    7. Perron, Pierre & Rodriguez, Gabriel, 2003. "GLS detrending, efficient unit root tests and structural change," Journal of Econometrics, Elsevier, vol. 115(1), pages 1-27, July.
    8. Richard H. Clarida & Jordi Gali & Mark Gertler, 1998. "Monetary policy rules in practice," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
    9. McCallum, Bennett T., 1999. "Issues in the design of monetary policy rules," Handbook of Macroeconomics,in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 23, pages 1483-1530 Elsevier.
    10. Elliott, Graham & Rothenberg, Thomas J & Stock, James H, 1996. "Efficient Tests for an Autoregressive Unit Root," Econometrica, Econometric Society, vol. 64(4), pages 813-836, July.
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    Keywords

    Ambiguity; Belief Function; Investment Bubble; Inference;

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