Is the Taylor Rule Still an Adequate Representation of Monetary Policy in Macroeconomic Models?

James Dean and Scott Schuh
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James Dean: West Virginia University, Department of Economics
Scott Schuh: West Virginia University, Department of Economics

No 21-05, Working Papers from Department of Economics, West Virginia University

Abstract: A Taylor Rule remains the consensus monetary policy specification in macroeconomic models despite unconventional monetary policies (UMP) and the policy rate stuck near zero in 2009-2015. We extend the literature by testing for structural breaks in benchmark macro models at 2007:Q3 that might reflect UMP. Significant breaks occurred altering model shocks, dynamics, and output gaps. The “shadow†funds rate proxies for UMP but has little effect on results. Deducing cause(s) of structural breaks is challenging due to changes in non-policy structure that may be unrelated to UMP and to the omission of UMP from the benchmark models.

Keywords: Taylor Rule; Structural Break; Macroeconomic Models; Unconventional Monetary Policy (search for similar items in EconPapers)
JEL-codes: C32 C50 E12 E13 E43 E52 E58 E61 E65 (search for similar items in EconPapers)
Pages: 56 pages
Date: 2021-12
New Economics Papers: this item is included in nep-cba, nep-cwa, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:wvu:wpaper:21-05

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