Testing the Monetary Policy Rule in the US: A Reconsideration of the Fed's Behaviour

A. Patrick L. Minford and Zhirong Ou

No E2009/19, Cardiff Economics Working Papers from Cardiff University, Cardiff Business School, Economics Section

Abstract: We calibrate a standard New Keynesian model with three alternative representations of monetary policy - an optimal timeless rule, a Taylor rule and another with interest rate smoothing - with the aim of testing which if any can match the data according to the method of indirect inference. We find that the only model version that fails to be strongly rejected is the optimal timeless rule. Furthermore this version can also account for the widespread finding of apparent 'Taylor rules' and 'interest rate smoothing' in the data, even though neither represents the true monetary policy

Keywords: Monetary policy; Kew Keynesian model; the 'target rule'; Taylor-type rules; Bootstrap simulation; VAR; Indirect inference; Wald statistic (search for similar items in EconPapers)
JEL-codes: E12 E17 E42 E52 E58 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Date: 2009-09, Revised 2009-10

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Persistent link: http://EconPapers.repec.org/RePEc:cdf:wpaper:2009/19

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