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.

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.

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.

A NOTE ON TIME VARIATION IN A FORWARD-LOOKING MONETARY POLICY RULE: EVIDENCE FROM EUROPEAN COUNTRIES

2012 ◽  
Vol 16 (S3) ◽  
pp. 422-437 ◽  
Author(s):  
N. Kundan Kishor
Keyword(s):  
Monetary Policy ◽  
Time Variation ◽  
Monetary Economics ◽  
Time Varying ◽  
Reaction Functions ◽  
The United Kingdom ◽  
Expected Inflation ◽  
Time Varying Parameter ◽  
Monetary Policy Reaction Functions ◽  
Forward Looking

This paper estimates time-varying forward-looking monetary policy reaction functions for the central banks of France, Germany, Italy, and the United Kingdom. We utilize the framework developed by Kim [Economics Letters91 (2006) 21–26] and Kim and Nelson [Journal of Monetary Economics(2006) 1949–1966] to deal with the issue of endogeneity in a time varying–parameter model. Our results find substantial time variation in the conduct of monetary policy in these four countries, which cannot be adequately captured by the conventional fixed-coefficient approach. Our findings suggest that there was a significant decline in the Bank of France's and the Bank of Italy's response to the German interest rate in 1992, and it coincided with the breakdown of the exchange rate management system in Europe. Our results suggest that the Bank of England was slower than the Bundesbank to increase its response to expected inflation, as its response to inflation became more than one-for-one only in the early 1980s.

scholarly journals Spillovers from US Monetary Policy: Evidence from a Time-varying Parameter GVAR Model

2018 ◽  
Author(s):  
Jesus Crespo Cuaresma ◽  
Gernot Doppelhofer ◽  
Martin Feldkircher ◽  
Florian Huber
Keyword(s):  
Monetary Policy ◽  
Time Varying ◽  
Time Varying Parameter ◽  
Us Monetary Policy

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.

HAS INFLATION TARGETING CHANGED THE CONDUCT OF MONETARY POLICY?

2013 ◽  
Vol 19 (1) ◽  
pp. 1-21 ◽  
Author(s):  
Jérôme Creel ◽  
Paul Hubert
Keyword(s):  
Monetary Policy ◽  
Inflation Targeting ◽  
Structural Break ◽  
Var Model ◽  
Inflation Expectations ◽  
Time Varying ◽  
Aggressive Action ◽  
Time Varying Parameter ◽  
Institutional Adoption ◽  
Do So

We aim at establishing whether the institutional adoption of inflation targeting has changed the conduct of monetary policy. To do so, we test the hypothesis of inflation targeting translating into a stronger response to inflation in a Taylor rule with three alternative econometric models: a structural break model, a time-varying parameter model with stochastic volatility, and a Markov-switching VAR model. We conclude that inflation targeting has not led to a stronger response to inflation in the reaction function of the monetary authority. This result suggests that inflation targeting being meant to anchor inflation expectations through enhanced credibility and accountability, it may enable a central bank to stabilize inflation without pursuing aggressive action toward inflation variations.

The effects of the monetary policy stance on the transmission mechanism

2014 ◽  
Vol 18 (3) ◽  
Author(s):  
Ana Beatriz Galvao ◽  
Massimiliano Marcellino
Keyword(s):  
Monetary Policy ◽  
Taylor Rule ◽  
Structural Break ◽  
Transmission Mechanism ◽  
Actual Rate ◽  
Negative Effects ◽  
The One ◽  
Actual Policy

AbstractThis paper contributes to the literature on changes in the transmission mechanism of monetary policy by introducing a model whose parameter evolution explicitly depends on the stance of monetary policy. The model, a structural break endogenous threshold VAR, also captures changes in the variance of shocks, and allows for a break in the parameters at an estimated time. We show that the transmission is asymmetric depending on the extention of the deviation of the actual policy rate from the one required by the Taylor rule. When the policy stance is tight – actual rate is higher than the one implied by the Taylor rule – contractionary shocks have stronger negative effects on output and prices.

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.

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