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Taylor Rule (taylor + rule)
Selected AbstractsMonetary Policy and Stock Prices in an Open EconomyJOURNAL OF MONEY, CREDIT AND BANKING, Issue 8 2007GIORGIO DI GIORGIO monetary policy; stock prices; Taylor Rule; open-economy DSGE models; wealth effects This paper studies monetary policy in a two-country model where agents can invest their wealth in both stock and bond markets. In our economy the foreign country hosts the only active equity market where also residents of the home country can trade stocks of listed foreign firms. We show that, in order to achieve price stability, the Central Banks in both countries should grant a dedicated response to movements in stock prices driven by relative productivity shocks. Determinacy of rational expectations equilibria and approximation of the Wicksellian interest rate policy by simple monetary policy rules are also investigated. [source] EXCHANGE RATE STABILISATION, LEARNING AND THE TAYLOR PRINCIPLEAUSTRALIAN ECONOMIC PAPERS, Issue 2 2007Article first published online: 30 MAY 200, HEINZ-PETER SPAHN The paper explores whether central banks can keep their interest rates independent from given foreign rates, and to what extent interest policies designed to stabilise nominal exchange rate changes can be applied instead of, or in addition to, the traditional interest rate response to inflation gaps. This modification of a Taylor Rule is analysed in a simple macro model with some New Keynesian features. Information is imperfect; agents cannot build rational expectations but try to learn ,true' market relations. Results show that the Taylor Principle can be generalised in an open economy with flexible exchange rates. [source] Using Taylor Rules to Understand European Central Bank Monetary PolicyGERMAN ECONOMIC REVIEW, Issue 3 2007Stephan Sauer Taylor rule; European Central Bank; real-time data Abstract. Over the last decade, the simple instrument policy rule developed by Taylor has become a popular tool for evaluating the monetary policy of central banks. As an extensive empirical analysis of the European Central Bank's (ECB) past behaviour still seems to be in its infancy, we estimate several instrument policy reaction functions for the ECB to shed some light on actual monetary policy in the euro area under the presidency of Wim Duisenberg and answer questions like whether the ECB has actually followed a stabilizing or a destabilizing rule so far. Looking at contemporaneous Taylor rules, the evidence presented suggests that the ECB is accommodating changes in inflation and hence follows a destabilizing policy. However, this impression seems to be largely due to the lack of a forward-looking perspective in such specifications. Either assuming rational expectations and using a forward-looking specification, or using expectations as derived from surveys result in Taylor rules that do imply a stabilizing role of the ECB. The use of real-time industrial production data does not seem to play such a significant role as in the case of the United States. [source] UNCERTAINTY AND MONETARY POLICY RULES IN THE UNITED STATESECONOMIC INQUIRY, Issue 2 2009CHRISTOPHER MARTIN This article analyzes the impact of uncertainty about the true state of the economy on monetary policy rules in the United States since the early 1980s. Extending the Taylor rule to allow for this type of uncertainty, we find evidence that the predictions of the theoretical literature on responses to uncertainty are reflected in the behavior of policymakers, suggesting that policymakers are adhering to prescriptions for optimal policy. Our estimates suggest that the effect of uncertainty on interest rates was most marked in 1983, when uncertainty increased interest rates by up to 140 basis points, in 1990,1991, when uncertainty reduced interest rates by up to 80 basis points, and in 1996,2001, when uncertainty reduced interest rates by up to 70 basis points over 5 yr. (JEL C51, C52, E52, E58) [source] Optimal Monetary Policy with Price and Wage RigiditiesECONOMIC NOTES, Issue 1 2006Massimiliano Marzo In this paper, I search for an optimal configuration of parameters for variants of the Taylor rule by using an accurate second-order welfare-based method within a fully microfounded dynamic stochastic model, with price and wage rigidities, without capital accumulation. A version of the model with distortionary taxation is also explicitly tested. The model is solved up to second-order solution. Optimal rules are obtained by maximizing a conditional welfare measure, differently from what has been done in the current literature. Optimal monetary policy functions turn out to be characterized by inflation targeting parameter lower than in empirical studies. In general, the optimal values for monetary policy parameters depend on the degree of nominal rigidities and on the role of fiscal policy. When nominal rigidities are higher, optimal monetary policy becomes more aggressive to inflation. With a tighter fiscal policy, optimal monetary policy turns out to be less aggressive to inflation. Impulse-response functions based on second-order model solution show a non-affine pattern when the economy is hit by shocks of different magnitude. [source] The Taylor Rule and Dynamic Stability in a Small Macroeconomic ModelECONOMIC NOTES, Issue 3 2003David Chappell In this paper, we embed the Taylor interest rate rule in a simple macroeconomic model with Calvo contracts. We contrast this with the case in which the interest rate is determined by the conventional LM curve along with a fixed value for the monetary aggregate. We derive conditions under which the adjustment of the economy is characterized by a unique saddle,path and show that the conditions required for this to be the case are more stringent when the authorities adopt the Taylor rule. In both cases, the possible failure of the saddle,path condition arises when there are debt,deflation effects in the IS curve. If interest rates are set according to the Taylor rule, then debt,deflation is always enough to cause the failure of the saddle,path condition. However, when interest rates are determined by the LM curve then it is possible that the real balance effect from the LM curve may offset the debt,deflation effect and produce a saddle,path. (J.E.L. E4, E5). [source] Using Taylor Rules to Understand European Central Bank Monetary PolicyGERMAN ECONOMIC REVIEW, Issue 3 2007Stephan Sauer Taylor rule; European Central Bank; real-time data Abstract. Over the last decade, the simple instrument policy rule developed by Taylor has become a popular tool for evaluating the monetary policy of central banks. As an extensive empirical analysis of the European Central Bank's (ECB) past behaviour still seems to be in its infancy, we estimate several instrument policy reaction functions for the ECB to shed some light on actual monetary policy in the euro area under the presidency of Wim Duisenberg and answer questions like whether the ECB has actually followed a stabilizing or a destabilizing rule so far. Looking at contemporaneous Taylor rules, the evidence presented suggests that the ECB is accommodating changes in inflation and hence follows a destabilizing policy. However, this impression seems to be largely due to the lack of a forward-looking perspective in such specifications. Either assuming rational expectations and using a forward-looking specification, or using expectations as derived from surveys result in Taylor rules that do imply a stabilizing role of the ECB. The use of real-time industrial production data does not seem to play such a significant role as in the case of the United States. [source] What you match does matter: the effects of data on DSGE estimationJOURNAL OF APPLIED ECONOMETRICS, Issue 5 2010Pablo A. Guerron-Quintana This paper explores the effects of using alternative combinations of observables for the estimation of Dynamic Stochastic General Equilibrium (DSGE) models. I find that the estimation of structural parameters describing the Taylor rule and sticky contracts in prices and wages is particularly sensitive to the set of observables. In terms of the model's predictions, the exclusion of some observables may lead to estimated parameters with unexpected outcomes, such as recessions following a positive technology shock. More importantly, two ways to assess different sets of observables are proposed. These measures favor a dataset consisting of seven observables. Copyright © 2009 John Wiley & Sons, Ltd. [source] Credit Spreads and Monetary PolicyJOURNAL OF MONEY, CREDIT AND BANKING, Issue 2010VASCO CÚRDIA credit frictions; interest rate rules; Taylor rules We consider the desirability of modifying a standard Taylor rule for interest rate policy to incorporate adjustments for measures of financial conditions. We consider the consequences of such adjustments for the way policy would respond to a variety of disturbances, using the dynamic stochastic general equilibrium model with credit frictions developed in Cúrdia and Woodford (2009a). According to our model, an adjustment for variations in credit spreads can improve upon the standard Taylor rule, but the optimal size of adjustment depends on the source of the variation in credit spreads. A response to the quantity of credit is less likely to be helpful. [source] Optimal Monetary Policy with an Uncertain Cost ChannelJOURNAL OF MONEY, CREDIT AND BANKING, Issue 5 2009PETER TILLMANN parameter uncertainty; min,max; cost channel; optimal monetary policy; Taylor rule The cost channel of monetary transmission describes a supply-side effect of interest rates on firms' costs. Previous research has found this effect to vary, both over time and across countries. Moreover, the cyclical nature of financial frictions is likely to amplify the cost channel. This paper derives optimal monetary policy in the presence of uncertainty about the true size of the cost channel. In a min,max approach, the central bank derives an optimal policy plan to be implemented by a Taylor rule. It is shown that uncertainty about the cost channel leads to an attenuated interest rate setting behavior. In this respect, the Brainard (1967) principle of cautious policy in the face of uncertainty continues to hold in both a Bayesian and a min,max framework. [source] Monetary and Fiscal Policy SwitchingJOURNAL OF MONEY, CREDIT AND BANKING, Issue 4 2007HESS CHUNG regime change; policy interactions; Taylor rule; fiscal theory of the price level A growing body of evidence finds that policy reaction functions vary substantially over different periods in the United States. This paper explores how moving to an environment in which monetary and fiscal regimes evolve according to a Markov process can change the impacts of policy shocks. In one regime monetary policy follows the Taylor principle and taxes rise strongly with debt; in another regime the Taylor principle fails to hold and taxes are exogenous. An example shows that a unique bounded non-Ricardian equilibrium exists in this environment. A computational model illustrates that because agents' decision rules embed the probability that policies will change in the future, monetary and tax shocks always produce wealth effects. When it is possible that fiscal policy will be unresponsive to debt at times, active monetary policy (like a Taylor rule) in one regime is not sufficient to insulate the economy against tax shocks in that regime and it can have the unintended consequence of amplifying and propagating the aggregate demand effects of tax shocks. The paper also considers the implications of policy switching for two empirical issues. [source] MONETARY POLICY DURING JAPAN'S LOST DECADE,THE JAPANESE ECONOMIC REVIEW, Issue 2 2006R. ANTON BRAUN We develop a quantitative costly price adjustment model with capital formation for the Japanese economy. The model respects the zero interest rate bound and is calibrated to reproduce the nominal and real facts from the 1990s. We use the model to investigate the properties of alternative monetary policies during this period. The setting of the long-run nominal interest rate in a Taylor rule is much more important for avoiding the zero bound than the setting of the reaction coefficients. A long-run interest rate target of 2.3% during the 1990s avoids the zero bound and enhances welfare. [source] Using Taylor Rules to Understand European Central Bank Monetary PolicyGERMAN ECONOMIC REVIEW, Issue 3 2007Stephan Sauer Taylor rule; European Central Bank; real-time data Abstract. Over the last decade, the simple instrument policy rule developed by Taylor has become a popular tool for evaluating the monetary policy of central banks. As an extensive empirical analysis of the European Central Bank's (ECB) past behaviour still seems to be in its infancy, we estimate several instrument policy reaction functions for the ECB to shed some light on actual monetary policy in the euro area under the presidency of Wim Duisenberg and answer questions like whether the ECB has actually followed a stabilizing or a destabilizing rule so far. Looking at contemporaneous Taylor rules, the evidence presented suggests that the ECB is accommodating changes in inflation and hence follows a destabilizing policy. However, this impression seems to be largely due to the lack of a forward-looking perspective in such specifications. Either assuming rational expectations and using a forward-looking specification, or using expectations as derived from surveys result in Taylor rules that do imply a stabilizing role of the ECB. The use of real-time industrial production data does not seem to play such a significant role as in the case of the United States. [source] The empirics of monetary policy rules in open economiesINTERNATIONAL JOURNAL OF FINANCE & ECONOMICS, Issue 4 2001Richard H. Clarida This paper uses the empirical framework for formulating and estimating forward looking monetary policy rules developed in Clarida, Gali and Gertler (1998, 1999, 2000, 2001) and Clarida (2000) to assess what we know, don't know, and can't tell about monetary policy making in an open economy with an (implicit) inflation target. Among the issues discussed are: the relationship between structural VAR models of monetary policy and exchange rates and estimates of forward-looking Taylor rules; the relationship between inflation targeting and leaning against the (exchange rate) wind; why central bankers are averse to even wide-band target zones; quantifying stresses and costs of a one-size-fits-all monetary policy for the members of a monetary union or currency bloc. Copyright © 2001 John Wiley & Sons, Ltd. [source] The ECB Governing Council in an Enlarged Euro Area,JCMS: JOURNAL OF COMMON MARKET STUDIES, Issue 1 2009AGNÈS BÉNASSY-QUÉRÉ We study the impact of rotating votes in the ECB Governing Council after EMU enlargement, based on national and euro-wide Taylor rules and on a convergence assumption. We find that the rotation system yields monetary policy decisions that are close both to full centralization and to a voting rule without rotations. [source] Credit Spreads and Monetary PolicyJOURNAL OF MONEY, CREDIT AND BANKING, Issue 2010VASCO CÚRDIA credit frictions; interest rate rules; Taylor rules We consider the desirability of modifying a standard Taylor rule for interest rate policy to incorporate adjustments for measures of financial conditions. We consider the consequences of such adjustments for the way policy would respond to a variety of disturbances, using the dynamic stochastic general equilibrium model with credit frictions developed in Cúrdia and Woodford (2009a). According to our model, an adjustment for variations in credit spreads can improve upon the standard Taylor rule, but the optimal size of adjustment depends on the source of the variation in credit spreads. A response to the quantity of credit is less likely to be helpful. [source] MONETARY POLICY WITH INVESTMENT,SAVING IMBALANCESMETROECONOMICA, Issue 3 2010Article first published online: 10 NOV 200, Roberto Tamborini ABSTRACT Financial instability is the new challenge for monetary policy. Most studies indicate that financial crises follow prolonged unwinding of investment,saving imbalances (ISI). These phenomena are not contemplated by the standard theoretical framework of continuous intertemporal equilibrium. This paper's aim is to take a first step into the analysis of monetary policy in the context of ISI. First, a dynamic model of a flex-price, competitive economy is presented where ISI are allowed to develop. Second, upon introducing different types of Taylor rules, some indications for the conduct of monetary policy emerge, which are at variance with the standard view. [source] Weak Identification of Forward-looking Models in Monetary Economics,OXFORD BULLETIN OF ECONOMICS & STATISTICS, Issue 2004Sophocles Mavroeidis Abstract Recently, single-equation estimation by the generalized method of moments (GMM) has become popular in the monetary economics literature, for estimating forward-looking models with rational expectations. We discuss a method for analysing the empirical identification of such models that exploits their dynamic structure and the assumption of rational expectations. This allows us to judge the reliability of the resulting GMM estimation and inference and reveals the potential sources of weak identification. With reference to the New Keynesian Phillips curve of Galí and Gertler [Journal of Monetary Economics (1999) Vol. 44, 195] and the forward-looking Taylor rules of Clarida, Galí and Gertler [Quarterly Journal of Economics (2000) Vol. 115, 147], we demonstrate that the usual ,weak instruments' problem can arise naturally, when the predictable variation in inflation is small relative to unpredictable future shocks (news). Hence, we conclude that those models are less reliably estimated over periods when inflation has been under effective policy control. [source] Inflation Targeting, Exchange Rate Volatility and International Policy CoordinationTHE MANCHESTER SCHOOL, Issue 4 2002Fernando Alexandre In a linear rational expectations two,country model, using an aggregate demand, aggregate supply framework, we analyse the effects of the adoption of an inflation,targeting regime on exchange rate volatility and the possible scope for policy coordination. This analysis is conducted using optimized interest rate policy rules within a calibrated model. Rules for interest rates that respond either to exchange rates or to portfolio shocks give improved performance and permit gains from international coordination. Optimized Taylor rules perform relatively well. [source] | ||||||||||