JAPAN: THE CASE FOR A TAYLOR RULE? A SIMPLE APPROACH

Domenico Depalo

Pacific Economic Review, 2006, vol. 11, issue 4, 327-546

Abstract: Abstract. In this article I propose two different models for analyzing the conduct of monetary policy, facing certain expectations. The first is a autoregressive model, which implicitly accounts for adaptive expectations, while the second accounts for the rational expectations. I used these models to judge whether or not the Taylor rule can be a good benchmark for the conduct of monetary policy in Japan. The conclusion is that a simple AR model fits the data better than the Taylor rule, and that assuming rational expectations in Japan could be highly misleading, at least since the mid‐1990s.

Date: 2006
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