The Use and Abuse of Taylor Rules: How Precisely Can We Estimate Them?

July 1, 2005

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Robert Tchaidze, and Alina Carare. The Use and Abuse of Taylor Rules: How Precisely Can We Estimate Them?, (USA: International Monetary Fund, 2005) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper draws attention to inconsistencies in estimating simple monetary policy rules and their implications for policy advice. We simulate a macroeconomic model with a backward reaction function similar to Taylor (1993). We estimate different versions of a policy rule, using these simulated data. Under certain circumstances, estimations document an illusionary presence of a lagged interest rate, or of forward-looking behavior. Our results are consistent with the fact that several authors found very different versions of monetary policy rules, all fitting the U.S. data well. We also survey the literature, providing a list of issues complicating practical use of Taylor rules.

Subject: Inflation, Output gap, Potential output, Real interest rates, Short term interest rates

Keywords: Central bank, Interest rate, Monetary policy, WP

Publication Details

Pages:

30
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2005/148
Stock No:

WPIEA2005148
ISBN:

9781451861679
ISSN:

1018-5941

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