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Estimating Taylor Rules in a Real Time Setting

  • Robert R Tchaidze
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    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

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    Paper provided by The Johns Hopkins University,Department of Economics in its series Economics Working Paper Archive with number 457.

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    Date of creation: Aug 2001
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    Handle: RePEc:jhu:papers:457
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    1. Laurence Ball, 1997. "Efficient Rules for Monetary Policy," NBER Working Papers 5952, National Bureau of Economic Research, Inc.
    2. Richard Clarida & Jordi Gali & Mark Gertler, 1997. "Monetary Policy Rules in Practice: Some International Evidence," NBER Working Papers 6254, National Bureau of Economic Research, Inc.
    3. Athanasios Orphanides & Simon van Norden, 1999. "The reliability of output gap estimates in real time," Finance and Economics Discussion Series 1999-38, Board of Governors of the Federal Reserve System (U.S.).
    4. Nelson, Edward, 2001. "UK Monetary Policy 1972-97: A Guide Using Taylor Rules," CEPR Discussion Papers 2931, C.E.P.R. Discussion Papers.
    5. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules And Macroeconomic Stability: Evidence And Some Theory," The Quarterly Journal of Economics, MIT Press, vol. 115(1), pages 147-180, February.
    6. John B. Taylor, 1998. "An Historical Analysis of Monetary Policy Rules," NBER Working Papers 6768, National Bureau of Economic Research, Inc.
    7. Bennett T. McCallum, 1997. "Issues in the Design of Monetary Policy Rules," NBER Working Papers 6016, National Bureau of Economic Research, Inc.
    8. Glenn D. Rudebusch, 2001. "Is The Fed Too Timid? Monetary Policy In An Uncertain World," The Review of Economics and Statistics, MIT Press, vol. 83(2), pages 203-217, May.
    9. Athanasios Orphanides, 1998. "Monetary policy rules based on real-time data," Finance and Economics Discussion Series 1998-03, Board of Governors of the Federal Reserve System (U.S.).
    10. Kevin J. Lansing, 2002. "Learning about a shift in trend output: implications for monetary policy and inflation," Working Paper Series 2000-16, Federal Reserve Bank of San Francisco.
    11. Newey, Whitney K & West, Kenneth D, 1987. "A Simple, Positive Semi-definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix," Econometrica, Econometric Society, vol. 55(3), pages 703-08, May.
    12. 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.
    13. Faust, Jon & Rogers, John H & Wright, Jonathan H, 2005. "News and Noise in G-7 GDP Announcements," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(3), pages 403-19, June.
    14. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
    15. Orphanides, Athanasios, 2002. "Activist stabilization policy and inflation: The Taylor rule in the 1970s," CFS Working Paper Series 2002/15, Center for Financial Studies (CFS).
    16. Hodrick, Robert J & Prescott, Edward C, 1997. "Postwar U.S. Business Cycles: An Empirical Investigation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(1), pages 1-16, February.
    17. Orphanides, Athanasios, 2003. "The quest for prosperity without inflation," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 633-663, April.
    18. Croushore, Dean & Stark, Tom, 2001. "A real-time data set for macroeconomists," Journal of Econometrics, Elsevier, vol. 105(1), pages 111-130, November.
    19. N. Gregory Mankiw & Matthew D. Shapiro, 1986. "News or Noise? An Analysis of GNP Revisions," NBER Working Papers 1939, National Bureau of Economic Research, Inc.
    20. Sack, Brian & Wieland, Volker, 2000. "Interest-rate smoothing and optimal monetary policy: a review of recent empirical evidence," Journal of Economics and Business, Elsevier, vol. 52(1-2), pages 205-228.
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