Leon, Costas (2006): The Taylor rule: can it be supported by the data?
Download (306kB) | Preview
The Taylor equation is a simple monetary policy rule that determines the Central Bank’s policy rate as a function of inflation and output. A significant body of literature verifies the consistency of the Taylor rule with the data. However, recently there has been a growing literature regarding the validity of the estimated parameters due to the non-stationarity of the interest rate. In this paper I test the consistency of the Taylor rule with the Greek data for the period 1996-2004. It appears that the data do not support the Taylor rule in the sense that they do not form a cointegration set of variables. Therefore, the estimated parameters should be considered fragile and the forecasting for the interest rate as a function of inflation and output should not be expected to be adequately consistent with the actual data.
|Item Type:||MPRA Paper|
|Institution:||Democritus University of Thrace|
|Original Title:||The Taylor rule: can it be supported by the data?|
|Keywords:||Taylor rule; Monetary policy; Central bank; EMU; Greece|
|Subjects:||F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics
E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies
|Depositing User:||Costas Leon|
|Date Deposited:||04. Feb 2007|
|Last Modified:||14. Feb 2013 02:54|
Amato, J., Laubach, T., 1999. The Value of Interest Rate Smoothing: How the Private Sector Helps the Federal Reserve, Economic Review, Federal Reserve Bank of Kansas City, 47-64.
Arghyrou, M., 2006. The Effects of the Accession of Greece to the EMU: Initial Estimates, Study No 64, The Centre of Economic Planning and Research (KEPE), Athens.
Castelnuovo, E., 2003. Taylor Rules and Interest Rate Smoothing in the US and EMU, Macroeconomics 0303002, EconWPA. http://ideas.repec.org/e/pca74.html.
Christiano, J.L., Rostagno, M., 2001. Money Growth Monitoring and the Taylor Rule, NBER Working Paper 8539, October.
Clarida, R., Gali, J., Gertler, M., 1998. Monetary Policy Rules in Practice: Some International Evidence, European Economic Review 42, 1033-1067.
Clarida, R., Gali, J., Gertler, M., 1999. The Science of Monetary Policy: A New Keynesian Perspective, Journal of Economic Literature, XXXVII, December, 1661-1707.
Clarida, R., Gali, J., Gertler, M., 2000. Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory, Quarterly Journal of Economics 115, 147-180.
Dickey, D. A., Fuller, W. A. 1979. Distributions of the Estimators for Autoregressive Time Series with a Unit Root. Journal of the American Statistical Association 74, 427–431.
Doménech, R., Ledo, M., Taguas, D., 2002. Some New Results on Interest Rate Rules in EMU and in the US, Journal of Economics and Business 54, 431-446.
Dornbusch, R., Favero, C., Giavazzi, F., 1998. A Red Letter Day, CEPR, Discussion Papers 1804.
Eleftheriou, M., 2003. On the Robustness of the Taylor Rule in the EMU, European University Institute Working Paper, ECO2003/17.
Engle, R. F., Granger, C.W.J., 1987. Co-integration, and Error Correction: Representation, Estimation, and Testing. Econometrica 55, 251–276, March.
Engle, R. F., Yoo, B. S., 1987. Forecasting and Testing in Co-integrated Systems. Journal of Econometrics 35, 143– 159.
Euro Area Monthly Bulletin, April, 2001. National Bank of Greece, 2001. Faust, J, Rogers, J., Wright, J.,H., 2001. An Empirical Comparison of Bundesbank and ECB Monetary Policy Rules, Board of Governors of the Federal Reserve System, International Finance Discussion Papers 705. Gerdesmeier, D., Roffia, B., 2003. Empirical Estimates of Reaction Functions for the Euro Area, ECB Working Paper 206, January. Gerlach, S., Schnabel, G., 1999. The Taylor Rule and Interest Rates in the EMU Area: A Note, BIS Working Paper 73. Hatanaka, M., 1996. Time-Series-Based Econometrics. Unit Roots and Cointegration. Advanced Texts in Econometrics, Oxford University Press. Hodrick, R., Prescott, E., 1997, Postwar U.S. Business Cycles: An Empirical Investigation, Journal of Money, Credit and Banking 29:1, 1-16.
Kozicki, S., 1999. How Useful Are Taylor Rules for Monetary Policy? Economic Review, Federal Reserve Bank of Kansas City, 5-33.
Lansing, K. J., 2002. Real-Time Estimation of Trend Output and the Illusion of Interest Rate Smoothing, Economic Review, Federal Reserve Bank of San Francisco.
Österholm, P., 2003. The Taylor Rule: A Spurious Regression? Forthcoming in Bulletin of Economic Research.
Peersman, G., Smets, F., 1998. Uncertainty and the Taylor Rule in a Simple Model of the Euro Area Economy, mimeo.
Phillips, P.C.B., 1986. Understanding Spurious Regressions in Econometrics, Journal of Econometrics 33, 311-340.
Phillips, P.C.B., 1988. Regression Theory for Near-Integrated Time Series, Econometrica 56, 1021-1043.
Rudebusch, G.D., 2002. Term Structure Evidence on Interest Rate Smoothing and Monetary Policy Inertia, Journal of Monetary Economics, 49, 1161-1187.
Söderlind, P., Söderström, U., Vredin, A., 2003. Taylor Rules and the Predictability of Interest Rates, Working Paper 147, Sveriges Riksbank.
Taylor, J.B., 1993. Discretion Versus Policy Rules in Practice, Carnegie-Rochester Conference Series on Public Policy 39, 195 – 214.