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Evaluating the Taylor Principle Over the Distribution of the Interest Rate: Evidence from the US, UK and Japan

  • Paul Mizen
  • Tae-Hwan Kim
  • Alan Thanaset

Support for the Taylor principle is considerable but the focus of empirical investigation has been on estimated coefficients at the mean of the interest rate distribution. We offer a new approach that estimates the response of interest rates to inflation and that output gap at various points (quantiles) on the Taylor principle at all but low rates in normal times for the US and the UK, but an increasingly aggressive (nonlinear) response to inflation as rates increase. This is robust to the inflation horizon, instrument choice and use of a real time output gap data. In abnormal times, described by events in Japan, we find strong support for the Taylor principle, and increasing aggression to inflation when rates increase. We confirm that increasing aggression towards inflation can be observed as interest rates approach zero. The results have implications for the modeling of economies when inflation is very low, and provides some insights into Japanese monetary policy in particular.

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Paper provided by University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM) in its series Discussion Papers with number 07/05.

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Handle: RePEc:not:notcfc:07/05
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