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The effects of Minsky moment and stock prices on the US Taylor Rule

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  • Paradiso, Antonio
  • Rao, B. Bhaskara

Abstract

This paper estimates the US Taylor rule for the period 1997 – 2010, with monthly data, a period characterized by two recessions and asset markets turbulences. Its novelties are that, firstly, we follow Weise and Barbera (2009) and include in the Taylor rule credit spreads (a variable which captures the so-called Minsky Moment) and a modified Wicksellian neutral interest rate. Secondly, we also include a variable to capture the effects of stock price movements. Thirdly, we find that all the variables in the US Taylor rule are I(1) in levels. Therefore, we estimate this equation with the time series methods of unit roots and cointegration, which is perhaps a novelty for the US Taylor rule. We find that there is a well defined cointegrating equation for the US Taylor rule embodying Wicksellian-Minsky effects and stock market movements. Secondly, the Federal Reserve system seems to give relatively a much larger weight to the objective of controlling inflation than to output and unemployment.

Suggested Citation

  • Paradiso, Antonio & Rao, B. Bhaskara, 2011. "The effects of Minsky moment and stock prices on the US Taylor Rule," MPRA Paper 27840, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:27840
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    File URL: https://mpra.ub.uni-muenchen.de/27840/1/MPRA_paper_27840.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Taylor rule; Minsky Moment; Wicksellian interest rate; Stock prices; Cointegration;

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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