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Interest Rates Rules

Author

Listed:
  • Ceri Davies

    () (Birmingham University)

  • Max Gillman

    () (Department of Economics, University of Missouri-St. Louis)

  • Michal Kejak

    () (CERGE-EI Prague)

Abstract

The paper uses a monetary economy to derive a ‘Taylor rule’ along the dynamic path and within the business cycle frequency of simulated data, a Fisher equation within the low frequency of simulated data, and predictions of Lucas-like policy changes that shift balanced growth path equilibria and expectations. The inflation coefficient is always greater than one when the velocity of money exceeds one, thus exhibiting robust Taylor principle behavior in a monetary economy. Successful estimates of the magnitude of the coefficient on inflation and the rest of the interest rate equation are presented using Monte Carlo simulated data for both business cycle and medium term frequencies. Policy analysis shows the biases in interest rate predictions as depending on whether changes in structural parameters and expectations about variables are correctly included.

Suggested Citation

  • Ceri Davies & Max Gillman & Michal Kejak, 2016. "Interest Rates Rules," Working Papers 1009, University of Missouri-St. Louis, Department of Economics.
  • Handle: RePEc:msl:workng:1009
    as

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    File URL: http://www.umsl.edu/econ/Research/WorkngPapers/UMSL_ECON_WP_1009.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Taylor rule; Fisher equation; velocity; expectations; misspecification bias; policy evaluation.;

    JEL classification:

    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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