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Disentangling permanent and transitory monetary shocks with a non-linear Taylor rule

Author

Listed:
  • J. A. Lafuente

    (Universitat Jaume I .)

  • R. Pérez

    ( Universidad Complutense and ICAE.)

  • J. Ruiz

    (Universidad Complutense and ICAE.)

Abstract

This paper provides an estimation method to decompose monetary policy innovations into persistent and transitory components using the non-linear Taylor rule proposed in Andolfatto et al. [Journal of Monetary Economics 55 (2008) 406–422]. In order to use the Kalman filter as the optimal signal extraction technique we use a convenient reformulation for the state equation by allowing expectations play in significant role in explaining the future time evolution of monetary shocks. This alternative formulation allows us to perform the maximum likelihood estimation for all the parameters involved in the monetary policy. Empirical evidence on US monetary policy making is provided for the period 1980-2011. We compare our empirical estimates with those obtained based on the particle filter. While both procedures lead to similar quantitative and qualitative findings, our approach has much less computational cost.

Suggested Citation

  • J. A. Lafuente & R. Pérez & J. Ruiz, 2018. "Disentangling permanent and transitory monetary shocks with a non-linear Taylor rule," Documentos de Trabajo del ICAE 2018-19, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico.
  • Handle: RePEc:ucm:doicae:1819
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    File URL: https://eprints.ucm.es/id/eprint/49145/1/1819.pdf
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    References listed on IDEAS

    as
    1. Mehdi Mostaghimi, 2004. "Monetary policy, composite leading economic indicators and predicting the 2001 recession," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 23(7), pages 463-477.
    2. Peter N. Ireland, 2007. "Changes in the Federal Reserve's Inflation Target: Causes and Consequences," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(8), pages 1851-1882, December.
    3. Andolfatto, David & Hendry, Scott & Moran, Kevin, 2008. "Are inflation expectations rational?," Journal of Monetary Economics, Elsevier, vol. 55(2), pages 406-422, March.
    4. Kozicki, Sharon & Tinsley, P.A., 2005. "Permanent and transitory policy shocks in an empirical macro model with asymmetric information," Journal of Economic Dynamics and Control, Elsevier, vol. 29(11), pages 1985-2015, November.
    5. Ben S. Bernanke, 2010. "Monetary policy and the housing bubble: a speech at the Annual Meeting of the American Economic Association, Atlanta, Georgia, January 3, 2010," Speech 499, Board of Governors of the Federal Reserve System (U.S.).
    6. repec:fip:fedgsq:y:2010:x:4 is not listed on IDEAS
    7. Orphanides, Athanasios, 2003. "Historical monetary policy analysis and the Taylor rule," Journal of Monetary Economics, Elsevier, vol. 50(5), pages 983-1022, July.
    8. Fabio Milani & John Treadwell, 2012. "The Effects of Monetary Policy “News” and “Surprises”," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(8), pages 1667-1692, December.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Monetary shocks; Kalman filter; Particle filter; Taylor rule.;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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