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The Influence of the Taylor rule on US monetary policy

  • Pelin Ilbas

    ()

    (National Bank of Belgium, Research Department)

  • Øistein Røisland

    ()

    (Norges Bank)

  • Tommy Sveen

    ()

    (BI Norwegian Business School)

We analyze the influence of the Taylor rule on US monetary policy by estimating the policy preferences of the Fed within a DSGE framework. The policy preferences are represented by a standard loss function, extended with a term that represents the degree of reluctance to letting the interest rate deviate from the Taylor rule. The empirical support for the presence of a Taylor rule term in the policy preferences is strong and robust to alternative specifications of the loss function. Analyzing the Fed's monetary policy in the period 2001-2006, we find no support for a decreased weight on the Taylor rule, contrary to what has been argued in the literature. The large deviations from the Taylor rule in this period are due to large, negative demand-side shocks, and represent optimal deviations for a given weight on the Taylor rule.

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Paper provided by National Bank of Belgium in its series Working Paper Research with number 241.

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Length: 36 pages
Date of creation: Jan 2013
Date of revision:
Handle: RePEc:nbb:reswpp:201301-241
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