Disentangling permanent and transitory monetary shocks with a non-linear Taylor rule

Juan Angel Lafuente, Rafaela Perez and Jesus Ruiz

No 2018-19, Documentos de Trabajo del ICAE from Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico

Abstract: This paper provides an estimation method to decompose monetary policy innovations into persistent and transitory components using the non-linear Taylor rule proposed in Andolfatto et al. [Journal of Monetary Economics 55 (2008) 406–422]. In order to use the Kalman filter as the optimal signal extraction technique we use a convenient reformulation for the state equation by allowing expectations play in significant role in explaining the future time evolution of monetary shocks. This alternative formulation allows us to perform the maximum likelihood estimation for all the parameters involved in the monetary policy. Empirical evidence on US monetary policy making is provided for the period 1980-2011. We compare our empirical estimates with those obtained based on the particle filter. While both procedures lead to similar quantitative and qualitative findings, our approach has much less computational cost.

Keywords: Monetary shocks; Kalman filter; Particle filter; Taylor rule. (search for similar items in EconPapers)
JEL-codes: C22 F31 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2018-09
New Economics Papers: this item is included in nep-cba, nep-ets and nep-mon
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Journal Article: Disentangling Permanent and Transitory Monetary Shocks with a Nonlinear Taylor Rule (2021)
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