The Use and Abuse of Taylor Rules: How Precisely Can We Estimate Them?
IMF Working Papers, July 1, 2005
Source details
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- The Use and Abuse of Taylor Rules: How Precisely Can We Estimate Them?
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Bibliographic details
- Authors: Robert Tchaidze, Alina Carare
- Published: July 1, 2005
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451861679.001
Summary and purpose
- Authors: Robert Tchaidze, Alina Carare
- Date: July 1, 2005
- This paper draws attention to inconsistencies in estimating simple monetary policy rules and their implications for policy advice.
- It surveys the literature and provides a list of issues complicating practical use of Taylor rules.
Methodology
- Simulate a macroeconomic model with a backward reaction function similar to Taylor (1993).
- Estimate different versions of a policy rule using the simulated data.
Key findings
- Under certain circumstances, estimations document an illusionary presence of a lagged interest rate.
- Under certain circumstances, estimations document an illusionary presence of forward-looking behavior.
- Results are consistent with the fact that several authors found very different versions of monetary policy rules, all fitting the U.S. data well.
- The paper compiles a list of issues that complicate the practical use of Taylor rules (survey of literature).
Subject coverage and keywords
- Subject: Inflation, Output gap, Potential output, Real interest rates, Short term interest rates
- Keywords: central bank, interest rate, monetary policy, WP