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The Observational Equivalence of Taylor Rule and Taylor-type Rules

Listed author(s):
  • Srinivasan, Naveen

    (Cardiff Business School)

  • Patrick Minford
  • Francesco Perugini

In a variety of recent papers, researchers have found that interest rate behaviour approximately follows a Taylor rule. From this they have concluded that the central bank is following a Taylor rule as its monetary policy reaction function. We show that such interest rate behaviour results when the central bank may be following quite different monetary policy rules from the one proposed by Taylor. In other words an interest rate relation with output and inflation does not identify a central bank reaction function.

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Paper provided by Royal Economic Society in its series Royal Economic Society Annual Conference 2002 with number 167.

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Date of creation: 29 Aug 2002
Handle: RePEc:ecj:ac2002:167
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  1. Frederic S. Mishkin, 1995. "Symposium on the Monetary Transmission Mechanism," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 3-10, Fall.
  2. Thomas J. Sargent, 1975. "The observational equivalence of natural and unnatural rate theories of macroeconomics," Working Papers 48, Federal Reserve Bank of Minneapolis.
  3. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," CEPR Discussion Papers 1908, C.E.P.R. Discussion Papers.
  4. Richard Clarida & Jordi Gali & Mark Gertler, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," NBER Working Papers 7147, National Bureau of Economic Research, Inc.
  5. Bennett T. McCallum & Edward Nelson, "undated". "An Optimizing IS-LM Specification for Monetary Policy and Business Cycle Analysis," GSIA Working Papers 1997-71, Carnegie Mellon University, Tepper School of Business.
  6. John B. Taylor, 1998. "An Historical Analysis of Monetary Policy Rules," NBER Working Papers 6768, National Bureau of Economic Research, Inc.
  7. McCallum, B.T. & Nelson, E., 1998. "Nominal Income Targeting in an Open-Economy Optimizing Model," Papers 644, Stockholm - International Economic Studies.
  8. Phelps, Edmund S & Taylor, John B, 1977. "Stabilizing Powers of Monetary Policy under Rational Expectations," Journal of Political Economy, University of Chicago Press, vol. 85(1), pages 163-190, February.
  9. 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.
  10. John B. Taylor, 2000. "Teaching Modern Macroeconomics at the Principles Level," American Economic Review, American Economic Association, vol. 90(2), pages 90-94, May.
  11. Robert J. Barro & Robert G. King, 1982. "Time-Separable Preference and Intertemporal-Substitution Models of Business Cycles," NBER Working Papers 0888, National Bureau of Economic Research, Inc.
  12. Minford, Patrick & Nowell, Eric & Webb, Bruce, 1999. "Nominal Contracts and Monetary Targets," CEPR Discussion Papers 2215, C.E.P.R. Discussion Papers.
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