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Time-Varying Coefficients in a GMM Framework: Estimation of a Forward Looking Taylor Rule for the Federal Reserve

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  • Partouche, H.

Abstract

This article deals with the estimation of a time-varying coefficients equation with endogenous regressors. A non-parametric approach is proposed, combining the Generalized Method of Moments (GMM) with the smoothing splines litterature as in Hodrick and Prescott (1981). This new method is used to analyze the evolution of a forward-looking Taylor rule for the Federal Reserve (FED) from 1960 until 2006. It suggests that monetary policy accommodated inflation during the 60s and the 70s whereas the chairmanship of P. Volcker was a turning point toward a more aggressive stance on inflation. In addition, monetary policy became more and more countercyclical.

Suggested Citation

  • Partouche, H., 2007. "Time-Varying Coefficients in a GMM Framework: Estimation of a Forward Looking Taylor Rule for the Federal Reserve," Working papers 177, Banque de France.
  • Handle: RePEc:bfr:banfra:177
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    File URL: https://publications.banque-france.fr/sites/default/files/medias/documents/working-paper_177_2007.pdf
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    References listed on IDEAS

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    1. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," The Quarterly Journal of Economics, Oxford University Press, pages 147-180.
    2. ., 2003. "Introduction," Chapters,in: State and Local Finances under Pressure, chapter 1 Edward Elgar Publishing.
    3. Schlicht, Ekkehart, 2004. "Estimating the Smoothing Parameter in the So-Called Hodrick-Prescott Filter," Discussion Papers in Economics 304, University of Munich, Department of Economics.
    4. Orphanides, Athanasios, 2001. "Monetary policy rules, macroeconomic stability and inflation: a view from the trenches," Working Paper Series 0115, European Central Bank.
    5. ., 2003. "Introduction," Chapters,in: Trade and Development, chapter 1 Edward Elgar Publishing.
    6. ., 2003. "Introduction," Chapters,in: Money Markets and Politics, chapter 1 Edward Elgar Publishing.
    7. Sowell, Fallaw, 1996. "Optimal Tests for Parameter Instability in the Generalized Method of Moments Framework," Econometrica, Econometric Society, vol. 64(5), pages 1085-1107, September.
    8. Jondeau E. & Le Bihan H. & Galles C., 2004. "Assessing Generalized Method-of-Moments Estimates of the Federal Reserve Reaction Function," Journal of Business & Economic Statistics, American Statistical Association, vol. 22, pages 225-239, April.
    9. Laurence M. Ball, 2006. "Has Globalization Changed Inflation?," NBER Working Papers 12687, National Bureau of Economic Research, Inc.
    10. Orphanides, Athanasios, 2004. "Monetary Policy Rules, Macroeconomic Stability, and Inflation: A View from the Trenches," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(2), pages 151-175, April.
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    Citations

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    Cited by:

    1. Andreas Beyer & Vitor Gaspar & Christina Gerberding & Otmar Issing, 2008. "Opting Out of the Great Inflation: German Monetary Policy After the Break Down of Bretton Woods," NBER Working Papers 14596, National Bureau of Economic Research, Inc.
    2. Yüksel, Ebru & Metin-Ozcan, Kivilcim & Hatipoglu, Ozan, 2013. "A survey on time-varying parameter Taylor rule: A model modified with interest rate pass-through," Economic Systems, Elsevier, pages 122-134.

    More about this item

    Keywords

    Monetary policy rules ; Generalized Method of Moments ; Time-varying coefficients ; Smoothing splines.;

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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