The Taylor rule: can it be supported by the data?

Costas Leon

MPRA Paper from University Library of Munich, Germany

Abstract: The Taylor equation is a simple monetary policy rule that determines the Central Bank’s policy rate as a function of inflation and output. A significant body of literature verifies the consistency of the Taylor rule with the data. However, recently there has been a growing literature regarding the validity of the estimated parameters due to the non-stationarity of the interest rate. In this paper I test the consistency of the Taylor rule with the Greek data for the period 1996-2004. It appears that the data do not support the Taylor rule in the sense that they do not form a cointegration set of variables. Therefore, the estimated parameters should be considered fragile and the forecasting for the interest rate as a function of inflation and output should not be expected to be adequately consistent with the actual data.

Keywords: Taylor rule; Monetary policy; Central bank; EMU; Greece (search for similar items in EconPapers)
JEL-codes: E58 F41 (search for similar items in EconPapers)
Date: 2006-08-31
New Economics Papers: this item is included in nep-for, nep-mac and nep-mon
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