The Taylor Rule, Wealth Effects and the Exchange Rate

Rudan Wang (), Bruce Morley and Javier Ordóñez
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Rudan Wang: Department of Economics, University of Bath, UK

No 2015/08, Working Papers from Economics Department, Universitat Jaume I, Castellón (Spain)

Abstract: The aim of this study is to develop models of the Taylor rule and a Taylor rule based exchange rate model incorporating wealth effects, as represented by both asset prices and asset wealth. In addition these wealth effects are further divided into stock market and housing wealth. Using data for Australia, Sweden, UK and the US, the Taylor model is estimated and then used to forecast out-of-sample. The results suggest that the effects of the asset prices and wealth on the Taylor rule are mixed and depend on the country and the form the wealth takes. The outof-sample forecast performance of both the wealth augmented Taylor rule model and Taylor rule exchange rate model are then compared with the conventional Taylor Rule model and a random walk and overall the wealth augmented models outperform the conventional model and random walk in these countries.

Keywords: exchange rate; wealth effect; forecast (search for similar items in EconPapers)
JEL-codes: F30 F37 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2015
New Economics Papers: this item is included in nep-for, nep-mon and nep-opm
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Related works:
Journal Article: The Taylor Rule, Wealth Effects and the Exchange Rate (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:jau:wpaper:2015/08

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