Posted

February 05, 2013 12:30:57 AM

Date

2013-01

Author

Pelin Ilbas, Øistein Røisland, and Tommy Sveen

Affiliation

National Bank of Belgium, Norges Bank, and BI Norwegian Business School

Title

The Influence of the Taylor rule on US monetary policy

Summary /
Abstract

We analyze the influence of the Taylor rule on US monetary policy by estimating the policy preferences of the Fed within a DSGE framework. The policy preferences are represented by a standard loss function, extended with a term that represents the degree of reluctance to letting the interest rate deviate from the Taylor rule. The empirical support for the presence of a Taylor rule term in the policy preferences is strong and robust to alternative specifications of the loss function. Analyzing the Fed's monetary policy in the period 2001-2006, we find no support for a decreased weight on the Taylor rule, contrary to what has been argued in the literature. The large deviations from the Taylor rule in this period are due to large, negative demand-side shocks, and represent optimal deviations for a given weight on the Taylor rule.

Keywords

Optimal monetary policy, simple rules, central bank preferences

URL

http://www.nbb.be/doc/oc/repec/reswpp/wp241En.pdf

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