Measuring monetary policy deviations from the Taylor rule

Joao Madeira; Nuno Palma

doi:10.1016/j.econlet.2018.03.034

Measuring monetary policy deviations from the Taylor rule

Joao Madeira
, Nuno Palma

Economics

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Abstract

We estimate deviations of the federal funds rate from the Taylor rule by taking into account the endogeneity of output and inflation to changes in interest rates. We do this by simulating the paths of these variables through a DSGE model using the estimated time series for the exogenous processes except for monetary shocks. We then show that taking the endogeneity of output and inflation into account can make a significant quantitative difference (which can exceed 40 basis points) when calculating the appropriate value of interest rates according to the Taylor rule.

Original language	English
Pages (from-to)	25-27
Number of pages	3
Journal	Economics Letters
Volume	168
Early online date	8 Apr 2018
DOIs	https://doi.org/10.1016/j.econlet.2018.03.034
Publication status	Published - Jul 2018

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title = "Measuring monetary policy deviations from the Taylor rule",

abstract = "We estimate deviations of the federal funds rate from the Taylor rule by taking into account the endogeneity of output and inflation to changes in interest rates. We do this by simulating the paths of these variables through a DSGE model using the estimated time series for the exogenous processes except for monetary shocks. We then show that taking the endogeneity of output and inflation into account can make a significant quantitative difference (which can exceed 40 basis points) when calculating the appropriate value of interest rates according to the Taylor rule.",

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AB - We estimate deviations of the federal funds rate from the Taylor rule by taking into account the endogeneity of output and inflation to changes in interest rates. We do this by simulating the paths of these variables through a DSGE model using the estimated time series for the exogenous processes except for monetary shocks. We then show that taking the endogeneity of output and inflation into account can make a significant quantitative difference (which can exceed 40 basis points) when calculating the appropriate value of interest rates according to the Taylor rule.

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DO - 10.1016/j.econlet.2018.03.034

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JO - Economics Letters

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Measuring monetary policy deviations from the Taylor rule

Abstract

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