scholarly journals MARKOV SWITCHING AND THE TAYLOR PRINCIPLE

2014 ◽  
Vol 19 (4) ◽  
pp. 913-930 ◽  
Author(s):  
Christian J. Murray ◽  
Alex Nikolsko-Rzhevskyy ◽  
David H. Papell
Keyword(s):  
Monetary Policy ◽  
Recent Trend ◽  
Taylor Rule ◽  
Markov Switching ◽  
Qualitative Difference ◽  
Historical Record ◽  
Time Varying ◽  
Monetary Regimes ◽  
Time Varying Parameters ◽  
The Interest Rate

Early research on the Taylor rule typically divided the data exogenously into pre-Volcker and Volcker–Greenspan subsamples. We contribute to the recent trend of endogenizing changes in monetary policy by estimating a real-time forward-looking Taylor rule with endogenous Markov switching coefficients and variance. The response of the interest rate to inflation is regime-dependent, with the pre- and post-Volcker samples containing monetary regimes where the Fed did and did not follow the Taylor principle. Although the Fed consistently adhered to the Taylor principle before 1973 and after 1984, it followed the Taylor principle from 1975 to 1979 and did not follow the Taylor principle from 1980 to 1984. We also find that the Fed only responded to real economic activity during the states in which the Taylor principle held. Our results are consistent with the idea that exogenously dividing postwar monetary policy into pre- and post-Volcker samples is misleading. The greatest qualitative difference between our results and recent research employing time-varying parameters is that we find that the Fed did not adhere to the Taylor principle during most of Paul Volcker's tenure, a finding that accords with the historical record of monetary policy.

Can a Taylor rule better explain the Fed’s monetary policy through the 1920s and 1930s? A nonlinear cliometric analysis

2018 ◽  
Vol 22 (5) ◽  
Author(s):  
Olivier Damette ◽  
Fredj Jawadi ◽  
Antoine Parent
Keyword(s):  
Monetary Policy ◽  
Business Cycle ◽  
Interwar Period ◽  
Taylor Rule ◽  
Structural Break ◽  
Output Gap ◽  
Time Varying ◽  
Working Paper ◽  
The Great Depression ◽  
Monetary Regimes

Abstract This paper investigates whether a variant of a Taylor rule applied to historical monetary data of the interwar period is useful to gain a better understanding of the Fed’s conduct of monetary policy over the period 1920–1940. To this end, we considered a standard Taylor rule (using two drivers: output gap and inflation gap) and proxied them differently for robustness. Further, we extended this Taylor rule to a nonlinear framework while enabling its coefficient to be time-varying and to change with regard to the phases in business cycle, in order to better capture any further asymmetry in the data and the structural break induced by the Great Depression. Accordingly, we showed two important findings. First, the linearity hypothesis was rejected, and we found that an On/Off Taylor Rule is appropriate to reproduce the conduct of monetary policy during the interwar period more effectively (the activation of drivers only occurs per regime). Second, unlike Field [Field, A. 2015. “The Taylor Rule in the 1920s.” Working Paper], we validated the use of a Taylor rule to explain the conduct of monetary policy in history more effectively. Consequently, this nonlinear Taylor rule specification provides interesting results for a better understanding of monetary regimes during the interwar period, and offers useful complements to narrative monetary history.

scholarly journals “WAIT-AND-SEE” MONETARY POLICY

2017 ◽  
Vol 23 (5) ◽  
pp. 1793-1814 ◽  
Author(s):  
Xiaowen Lei ◽  
Michael C. Tseng
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Interest Rates ◽  
Taylor Rule ◽  
Adjustment Costs ◽  
Optimal Timing ◽  
Bank Of Canada ◽  
Wait And See ◽  
The Interest Rate ◽  
Better Than

This paper develops a model of the optimal timing of interest rate changes. With fixed adjustment costs and ongoing uncertainty, changing the interest rate involves the exercise of an option. Optimal policy therefore has a “wait-and-see” component, which can be quantified using option pricing techniques. We show that increased uncertainty makes the central bank more reluctant to change its target interest rate, and argue that this helps explain recent observed deviations from the Taylor Rule. An optimal wait-and-see policy fits the target interest rates of the Fed and Bank of Canada better than the Taylor Rule.

Term Premium Dynamics and the Taylor Rule

2017 ◽  
Vol 07 (04) ◽  
pp. 1750011 ◽  
Author(s):  
Michael Gallmeyer ◽  
Burton Hollifield ◽  
Francisco Palomino ◽  
Stanley Zin
Keyword(s):  
Monetary Policy ◽  
Term Structure ◽  
Taylor Rule ◽  
Exchange Economy ◽  
Bond Pricing ◽  
Time Varying ◽  
Inflation Dynamics ◽  
Term Premium ◽  
Nominal Term

We explore the bond-pricing implications of an exchange economy where preference shocks result in time-varying term premiums in real yields with a Taylor rule determining inflation dynamics and nominal term premiums. We calibrate the model by matching the term structure of the means and volatilities of nominal yields. Unlike a model with exogenous inflation, a Taylor rule matching empirical properties of inflation leads to nominal term premiums that are volatile at long maturities. Increasing monetary policy aggressiveness decreases the level and volatility of nominal yields.

scholarly journals Modeling changes in US monetary policy with a time-varying nonlinear Taylor rule

2018 ◽  
Vol 22 (5) ◽  
Author(s):  
Anh D. M. Nguyen ◽  
Efthymios G. Pavlidis ◽  
David A. Peel
Keyword(s):  
Monetary Policy ◽  
Economic Activity ◽  
Sequential Monte Carlo ◽  
Taylor Rule ◽  
Structural Break ◽  
Monetary Economics ◽  
Time Varying ◽  
Sequential Monte Carlo Methods ◽  
Asymmetric Preferences ◽  
Us Monetary Policy

Abstract The monetary economics literature has highlighted four issues that are important in evaluating US monetary policy since the late 1960s: (i) time variation in policy parameters, (ii) asymmetric preferences, (iii) real-time nature of data, and (iv) heteroskedasticity. In this paper, we exploit advances in sequential monte carlo methods to estimate a time-varying nonlinear Taylor rule that addresses these four issues simultaneously. Our findings suggest that US monetary policy has experienced substantial changes in terms of both the response to inflation and to real economic activity, as well as changes in preferences. These changes cannot be captured adequately by a single structural break at the late 1970s, as has been commonly assumed in the literature, and play a non-trivial role in economic performance.

scholarly journals Matching NBP interest rates to different versions of the Taylor rule

2019 ◽  
Vol 14 (2) ◽  
pp. 165-177
Author(s):  
Tomasz Grabia
Keyword(s):  
Economic Growth ◽  
Monetary Policy ◽  
Interest Rate ◽  
Interest Rates ◽  
Economic Crisis ◽  
Real Interest Rate ◽  
Taylor Rule ◽  
Macroeconomic Variables ◽  
The Interest Rate ◽  
Gdp Gap

The interest rate is the basic instrument of monetary policy, directly or indirectly affecting basic macroeconomic variables, such as inflation, unemployment and economic growth. The aim of the article is to compare the NBP reference rate with hypothetical rates calculated on the basis of different variants of the Taylor rule and to indicate which of those variants is best suited to the situation in Poland. The study period of 2000-2017 was adopted for the analysis. On its basis, it was found that in most cases the real interest rate of the central bank in Poland strongly coincided with rates that would have been set if one of the varieties of the Taylor rule had been in force. The best match coincided with the modified version of this rule, which was created after the economic crisis. That means that the NBP took into account both the deviations of inflation from the target and the GDP gap when making decisions regarding interest rates.

Changes in US Monetary Policy and Its Transmission over the Last Century

2019 ◽  
Vol 20 (4) ◽  
pp. 447-470 ◽  
Author(s):  
Sebastian Breitfuß ◽  
Florian Huber ◽  
Martin Feldkircher
Keyword(s):  
Monetary Policy ◽  
Interest Rates ◽  
Bank Lending ◽  
Time Varying ◽  
Time Varying Parameter ◽  
Short And Long Term ◽  
Monetary Policy Shock ◽  
The Interest Rate ◽  
Shrinkage Priors ◽  
Us Monetary Policy

Abstract In this paper, we investigate US monetary policy and its time-varying effects over more than 130 years. For that purpose, we use a Bayesian time-varying parameter vector autoregression that features modern shrinkage priors and stochastic volatility. Our results can be summarized as follows: First, we find that monetary policy transmits jointly through the interest rate, credit/bank lending and wealth channels. Second, we find evidence for changes of both responses to a monetary policy shock and volatility characterizing the macroeconomic environment. Effects on the macroeconomy are significantly lower in the period from 1960 to 2013 than in the early part of our sample, whereas responses of short- and long-term interest rates are nearly unaltered throughout the sample. Changes in the way the Fed conducts monetary policy and different economic environments may account for that.

scholarly journals ANALYSIS OF THE ECB MONETARY POLICY MATCH FOR THE NEEDS OF THE EURO AREA COUNTRIES NEEDS

Ekonomika ◽  
2013 ◽  
Vol 92 (3) ◽  
pp. 41-58
Author(s):  
Tomas Reichenbachas
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Interest Rates ◽  
Euro Area ◽  
Taylor Rule ◽  
Currency Area ◽  
The Face ◽  
Asymmetric Shock ◽  
The Interest Rate ◽  
The One

Abstract. In this paper, using the Taylor rule (Taylor, 1993), the European Central Bank (ECB) monetary policy in 2000–2012, as well as individual interest rate needs of the euro area (EA) countries are analysed. It is assumed that the estimated Taylor rule interest rates are optimal for individual members. We have analysed whether the actual ECB interest rates and the calculated rates are different and have become more balanced towards individual countries’ needs. The work focuses attention on the last period (2008–2012) when the EA faced economic problems and an asymmetric shock. The analysis shows controversial results: on the one hand, the interest deviation mean decreases (just a little), but an increasing gap between individual needs can be seen: some countries are becoming increasingly divorced from the general EA needs. It makes them very vulnerable, and there is a risk that these countries in the face of asymmetric challenges can be “left behind” by the ECB focusing on the EA as a whole. Also, in this paper, the stationarity of the calculated deviations is analysed to help understand their nature. This approach is new, and the author is unaware of similar works. Analysis of the optimal interest rate dynamics has revealed that Germany needed the interest rates that were opposite to the needs of Spain and Greece and susceptible to divergence, so this led to the ECB difficulties in determining the proper interest for all countries’ needs. The EA as a currency area is most optimal for Belgium, Cyprus, Finland, France, Italy, and the Netherlands from the interest rate setting perspective.Key words: the Taylor rule, optimal monetary policy, asymmetric shocks, optimal currency area

scholarly journals Has the Fed Responded to House and Stock Prices? A Time-Varying Analysis

2021 ◽  
pp. 1-28
Author(s):  
Knut Are Aastveit ◽  
Francesco Furlanetto ◽  
Francesca Loria
Keyword(s):  
Monetary Policy ◽  
Stock Prices ◽  
Stock Price ◽  
House Prices ◽  
House Price ◽  
Structural Var ◽  
Time Varying ◽  
Systematic Component ◽  
Price Growth ◽  
The Interest Rate

Abstract We investigate whether the Federal Reserve has responded systematically to house and stock prices and whether this response has changed over time using a Bayesian structural VAR model with time-varying parameters and stochastic volatility. To recover the systematic component of monetary policy, we interpret the interest rate equation in the VAR as an extended monetary policy rule responding to ination, the output gap, house prices and stock prices. Our results indicate that the systematic component of monetary policy in the U.S. responded to real stock price growth significantly but episodically, mainly around recessions and periods of financial instability, and took real house price growth into account only in the years preceding the Great Recession. Around half of the estimated response captures the predictor role of asset prices for future ination and real economic activity, while the remaining component reects a direct response to stock prices and house prices.

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