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The U.S. Dynamic Taylor Rule With Multiple Breaks, 1984-2001

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  • Travaglini, Guido

Abstract

This paper combines two major strands of literature: structural breaks and Taylor rules. At first, I propose a nonstandard t-test statistic for detecting multiple level and trend breaks of I(0) series by supplying theoretical and limit-distribution critical values obtained from Montecarlo experimentation. Thereafter, I introduce a forward-looking Taylor rule expressed as a dynamic model which allows for multiple breaks and reaction-function coefficients of the leads of inflation, of the output gap and of an equity market index. Sequential GMM estimation of the model, applied to the Effective Federal Funds Rate for the period 1984:01-2001:06, produces three main interesting results: the existence of significant structural breaks, the substantial role played by inflation in the FOMC decisions and a marked equity targeting policy approach. Such results reveal departures from rationality, determined by structured and unstructured uncertainty, which the Fed systematically attempts at reducing by administering inflation scares and misinformation about the actual Phillips curve, in order to keep the output and equity markets under control.

Suggested Citation

  • Travaglini, Guido, 2007. "The U.S. Dynamic Taylor Rule With Multiple Breaks, 1984-2001," MPRA Paper 3419, University Library of Munich, Germany, revised 15 Jun 2007.
  • Handle: RePEc:pra:mprapa:3419
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    Keywords

    Generalized Method of Moments; Monetary Policy Rules; Multiple Breaks;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General

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