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 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 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.

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 The Monetary Policy of the National Bank of Romania in The Inflation Targeting Era. A Taylor Rule Approach

2015 ◽  
Vol 8 (2) ◽  
pp. 91-102
Author(s):  
Bogdan Căpraru ◽  
Norel Ionuţ Moise ◽  
Andrei Rădulescu
Keyword(s):  
Monetary Policy ◽  
Financial Stability ◽  
Inflation Targeting ◽  
Taylor Rule ◽  
Output Gap ◽  
Inflation Differential ◽  
Rule Approach ◽  
National Bank ◽  
Potential Gdp ◽  
The One

AbstractIn this paper we analyse the monetary policy of the National Bank of Romania during 2005-2015 by estimating the Taylor rule, on a quarterly basis. We determined the potential GDP by employing the Hodrick-Prescott filter, in order to distinguish between the cyclical and the structural components of the output. Then, we estimated the traditional Taylor rule function (with a classic OLS regression), but slightly modified, as to take into account the forward-looking attitude of the NBR. The results confirm the direct correlation between the monetary policy rate and the output gap on the one hand, and the inflation differential (inflation - inflationtarget) on the other hand. Also, the results show us that NBR paid a higher attention to the dynamics of the inflation versus its target than to the output gap. Last, but not least, the central bank has been also sensitive to the financial stability, as reflected by the results of the incorporation of the ROBOR-EURIBOR spread in the classical Taylor rule.

scholarly journals Optimal policy and Taylor rule cross-checking under parameter uncertainty

2014 ◽  
Vol 0 (0) ◽  
Author(s):  
Dirk Bursian ◽  
Markus Roth
Keyword(s):  
Monetary Policy ◽  
Parameter Uncertainty ◽  
Optimal Policy ◽  
Model Uncertainty ◽  
Taylor Rule ◽  
Monetary Authority ◽  
Output Gap ◽  
Output Stabilization

AbstractWe examine whether the robustifying nature of Taylor rule cross-checking under model uncertainty carries over to the case of parameter uncertainty. Adjusting monetary policy based on this kind of cross-checking can improve the outcome for the monetary authority. This, however, crucially depends on the relative welfare weight that is attached to the output gap and also the degree of monetary policy commitment. We find that Taylor rule cross-checking is on average able to improve losses when the monetary authority only moderately cares about output stabilization and when policy is set in a discretionary way.

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 Monetary Policy Is Not Always Systematic and Data-Driven

2020 ◽  
Vol 20 (04) ◽  
Author(s):  
Ales Bulir ◽  
Jan Vlcek
Keyword(s):  
Monetary Policy ◽  
Inflation Targeting ◽  
Yield Curve ◽  
Data Driven ◽  
Price Stability ◽  
Multiple Objective ◽  
Output Gap ◽  
Policy Decisions ◽  
Policy Regime ◽  
Monetary Regimes

Does monetary policy react systematically to macroeconomic innovations? In a sample of 16 countries – operating under various monetary regimes – we find that monetary policy decisions, as expressed in yield curve movements, do react to macroeconomic innovations and these reactions reflect the monetary policy regime. While we find evidence of the primacy of the price stability objective in the inflation targeting countries, links to inflation and the output gap are generally weaker and less systematic in money-targeting and multiple-objective countries.

scholarly journals The Post-COVID-19 Economic Policy Uncertainty and the Effectiveness of Monetary Policy: Evidence From China

2021 ◽  
Vol 9 ◽  
Author(s):  
Yuegang Song ◽  
Yanling Yang ◽  
Jianzhong Yu ◽  
Zhichao Zhao
Keyword(s):  
Monetary Policy ◽  
Economic Policy ◽  
Central Bank ◽  
Threshold Effect ◽  
Policy Instrument ◽  
Output Gap ◽  
Policy Uncertainty ◽  
Time Varying ◽  
Vector Autoregressive ◽  
Economic Policy Uncertainty

The outbreak of the COVID-19 pandemic has caused an upsurge economic policy uncertainty (EPU). Study on the time-varying effect of EPU is of substantial implication for the central bank in implementation of monetary policy. To empirically investigate the time-varying effect of EPU, the paper considers the shock of the monetary policy implemented by China's central bank on different economic variables including interest rate, output gap, and inflationary gap using the latent threshold time-varying parameter vector autoregressive model (LT-TVP-VAR Model). Data period is chosen to be January 2015 through April 2021. Our findings show that (i) EPU has a significant threshold effect on the shock of quantitative monetary policy instrument and the shock of price-based monetary policy, and that the two types of policy are positively correlated; (ii) the price-based monetary policy instrument has a significant counter-cyclical effect on both output gap and inflationary gap; (iii) relative to the quantitative monetary policy instrument, the price-based monetary policy instrument has a more significant counter-cyclical effect on output gap; and (iv) a higher level of EPU is associated with a more significant monetary policy effect on output gap and inflationary gap.

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