ARE TAYLOR-BASED MONETARY POLICY RULES FORWARD-LOOKING?. AN INVESTIGATION USING SUPEREXOGENEITY TESTS

Rajeev SOOREEA ()

Applied Econometrics and International Development, 2007, vol. 7, issue 2, pages 87-94

Abstract: Unlike previous studies which use statistical break tests to analyze the forward-lookingness of monetary policy rules, this study proposes the methodology that if the parameters of the Taylor rule change when the mechanism generating inflation changes, that is the Lucas critique applies, then inflation is not superexogenous for the parameters of the Taylor rule. In this case where superexogeneity fails, the rule is forward-looking. However, although the results indicate that the volatility of inflation (captured by a discrete heteroskedastic variance model of regime shifts) reduced by almost 50 percent, we fail to reject the null that inflation is superexogenous to the parameters of the Taylor rule. This implies that there is no evidence that Taylor-based monetary policy rules are forward-looking.

Keywords: Taylor Rules; Forward-looking; Superexogeneity Tests (search for similar items in EconPapers)
JEL-codes: C52 E52 (search for similar items in EconPapers)
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