Analyzing the Taylor Rule with Wavelet Lenses

This paper analyses the Taylor Rule in the U.S. 1960-2014 with new lenses: continuous time partial wavelets tools. We assess the co-movement between the policy interest rate and the macroeconomic variables in the Rule, inflation and the output gap, both jointly and independently, for each frequency and at each moment of time. Our results uncover some new stylized facts about U.S. monetary policy and add new insights to the record of U.S. monetary history since the early 1960s. Among other things we conclude that monetary policy has been successful in stabilizing inflation. However, its effectiveness varies both in time and frequencies. Monetary policy has lagged the output gap across most of the sample, but in recent times became more reactive. Volcker’s disinflation, and the conquest of credibility in 1979-1986, was achieved with no extra costs in terms of output.