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Measuring monetary policy deviations from the Taylor rule

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  • Madeira, João
  • Palma, Nuno Pedro G.

Abstract

We estimate deviations of the federal funds rate from the Taylor rule by taking into account the endogeneity of output and inflation to changes in interest rates. We do this by simulating the paths of these variables through a DSGE model using the estimated time series for the exogenous processes except for monetary shocks. We then show that taking the endogeneity of output and inflation into account can make a significant quantitative difference (which can exceed 40 basis points) when calculating the appropriate value of interest rates according to the Taylor rule.

Suggested Citation

  • Madeira, João & Palma, Nuno Pedro G., 2018. "Measuring monetary policy deviations from the Taylor rule," CEPR Discussion Papers 12553, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:12553
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    More about this item

    Keywords

    Bayesian estimation; Business Cycles; DSGE; interest rates; New Keynesian models; sticky prices;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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