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The Influence of the Taylor rule on US monetary policy

Author Info

Listed author(s):
  • Pelin Ilbas

    ()

    (National Bank of Belgium, Research Department)

  • Øistein Røisland

    ()

    (Norges Bank)

  • Tommy Sveen

    ()

    (BI Norwegian Business School)

Abstract

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
Handle: RePEc:nbb:reswpp:201301-241
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Keywords: optimal monetary policy; simple rules; central bank preferences;

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Find related papers by JEL classification:
  • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
  • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
  • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
  • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
  • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes

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Cited by:

  1. J. Boeckx & N. Cordemans & M. Dossche, 2013. "Causes and implications of the low level of the risk-free interest rate," Economic Review, National Bank of Belgium, issue ii, pages 63-88, September.
  2. Carl Walsh, 2015. "Goals and Rules in Central Bank Design," CESifo Working Paper Series 5293, CESifo Group Munich.
  3. Maciej Ryczkowski, 2016. "Poland as an inflation nutter:The story of successful output stabilization," Zbornik radova Ekonomskog fakulteta u Rijeci/Proceedings of Rijeka Faculty of Economics, University of Rijeka, Faculty of Economics, vol. 34(2), pages 363-392.

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