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Interest rates, government purchases and the Taylor rule in recessions and expansions

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  • Antonia López-Villavicencio

    (CEPN - Centre d'Economie de l'Université Paris Nord - UP13 - Université Paris 13 - USPC - Université Sorbonne Paris Cité - CNRS - Centre National de la Recherche Scientifique)

Abstract

In this paper we study asymmetries in the Taylor rule for the United States during the 1970-2012 period. We show that monetary authorities have been constantly concerned with excess demand in overheated periods -when the output gap is positive or the unemployment rate falls below 7 or 7.5 percentraising the interest rate aggressively in that case. However, the Fed seems more reluctant to decrease the fund's rate during recessions. On the contrary, monetary authorities react symmetrically to inflation in booms and busts. Finally, we provide evidence that an expansionary fiscal policy does not lead to an increase in interest rates, and thus there is not necessary a "crowding-out" effect in recession.

Suggested Citation

  • Antonia López-Villavicencio, 2013. "Interest rates, government purchases and the Taylor rule in recessions and expansions," Post-Print hal-05455757, HAL.
    • Handle: RePEc:hal:journl:hal-05455757
    DOI: 10.1016/j.jmacro.2013.08.019
    Note: View the original document on HAL open archive server: https://hal.science/hal-05455757v1
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    References listed on IDEAS

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