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Estimating Taylor Rules in a Real Time Setting

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  • Robert R Tchaidze

Abstract

This paper demonstrates how the use of revised data distorts our understanding of past monetary policy decisions Three problems are addressed - the use of (i) contemporaneous rather than lagged data (ii) revised rather than unrevised data; and (iii) leads of data unavailable at the time of policy setting for estimating potential output In order to evaluate each of these distortions separately I have estimated Taylor rules using different sets of estimates of output gap and inflation for three sub-samples corresponding to chairmanship terms of Arthur Burns Paul Volcker and Alan Greenspan Three series of estimates are constructed -- series based on revised estimates of data for the whole post-war sample; series based on truncated (excluding leads) subsamples of revised data; and series similar to the previous one but based on unrevised data Although using revised data may produce significantly misleading conclusions the inclusion of leads of the data when estimating the potential level of the economy has a much bigger impact producing coefficients which may have a value less than half of the true one At the same time the use of contemporaneous rather than lagged data does not seem to have a big effect on the final results Among other things I demonstrate that the US monetary policy was less active during Burns' chairmanship and much more anti-inflationary during Greenspan's than traditional analysis would suggest

Suggested Citation

  • Robert R Tchaidze, 2001. "Estimating Taylor Rules in a Real Time Setting," Economics Working Paper Archive 457, The Johns Hopkins University,Department of Economics.
  • Handle: RePEc:jhu:papers:457
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    References listed on IDEAS

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    13. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 33(1), pages 125-132.
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    Cited by:

    1. Nadia Tahir, 2013. "Forward-Looking and Backward-Looking Taylor Rules: Evidence from Pakistan," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 18(2), pages 121-145, July-Dec.
    2. Mandler, Martin, 2007. "Decomposing Federal Funds Rate forecast uncertainty using real-time data," MPRA Paper 13498, University Library of Munich, Germany, revised Jan 2009.
    3. Serena Ng & Pierre Perron, 2002. "PPP May not Hold Afterall: A Further Investigation," Annals of Economics and Finance, Society for AEF, vol. 3(1), pages 43-64, May.
    4. Robert Tchaidze, 2004. "The Greenbook and U.S. Monetary Policy," IMF Working Papers 04/213, International Monetary Fund.
    5. Laurence Ball & Robert R. Tchaidze, 2002. "The Fed and the New Economy," American Economic Review, American Economic Association, vol. 92(2), pages 108-114, May.
    6. Patrick Lünnemann & Abdelaziz Rouabah, 2003. "Règle de Taylor: estimation et interprétation pour la zone euro et pour le Luxembourg," BCL working papers 9, Central Bank of Luxembourg.
    7. Robert Tchaidze, 2002. "Greenspan and the Greenbook," Economics Working Paper Archive 472, The Johns Hopkins University,Department of Economics.
    8. Mandler, Martin, 2012. "Decomposing Federal Funds Rate forecast uncertainty using time-varying Taylor rules and real-time data," The North American Journal of Economics and Finance, Elsevier, vol. 23(2), pages 228-245.

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