IDEAS home Printed from https://ideas.repec.org/p/ptu/wpaper/w200203.html
   My bibliography  Save this paper

Modelling Taylor Rule Uncertainty

Author

Listed:
  • Fernando Martins
  • José A. F. Machado
  • Paulo Soares Esteves

Abstract

In recent years, one has witnessed a widespread attention on the way monetary policy is conducted and in particular on the role of the so-called monetary policy rules. The conventional approach in the literature consists in estimating reaction functions for a monetary authority (the Federal Reserve, in most cases) in which a nominal interest rate, directly or indirectly controlled by that monetary authority, is adjusted in response to deviations of inflation (current or expected) from target and of output from potential. These reaction functions, usually called Taylor rules, following John Taylor's seminal paper published in 1993, match a number of normative principles set forth in the literature for optimal monetary policy. This provides a good reason for the growing prominence of indications given by Taylor rule estimations in debates about current and prospective monetary policy stance. However, they are usually presented as point estimates for the interest rate, giving a sense of accuracy that can be misleading. Typically, no emphasis is placed on the risks of those estimates and, at least to a certain extent, the reader is encouraged to concentrate on an apparently precise central projection, ignoring the wide degree of uncertainty and operational difficulties surrounding the estimates. As in any forecasting exercise, there is uncertainty regarding both the estimated parameters and the way the explanatory variables evolve during the forecasting horizon. Our work presents a methodology to estimate a probability density function for the interest rate resulting from the application of a Taylor rule (the Taylor interest rate) which acknowledges that not only the explanatory variables but also the parameters of the rule are random variables.

Suggested Citation

  • Fernando Martins & José A. F. Machado & Paulo Soares Esteves, 2002. "Modelling Taylor Rule Uncertainty," Working Papers w200203, Banco de Portugal, Economics and Research Department.
  • Handle: RePEc:ptu:wpaper:w200203
    as

    Download full text from publisher

    File URL: https://www.bportugal.pt/sites/default/files/anexos/papers/wp200203.pdf
    Download Restriction: no

    More about this item

    JEL classification:

    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ptu:wpaper:w200203. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (DEE-NTD). General contact details of provider: http://edirc.repec.org/data/bdpgvpt.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.