Disentangling Permanent and Transitory Monetary Shocks with a Nonlinear Taylor Rule

Lafuente Juan Ángel (), Monfort Mercedes, Rafaela Perez and Jesus Ruiz
Additional contact information
Lafuente Juan Ángel: Department of Finance and Accounting and IEI, University Jaume I, Castelló, Spain
Monfort Mercedes: Department of Economics and IEI, University Jaume I, Castelló, Spain

Economics - The Open-Access, Open-Assessment Journal, 2021, vol. 15, issue 1, 150-162

Abstract: This article provides an estimation method to decompose monetary policy innovations into persistent and transitory components using the nonlinear Taylor rule proposed in Andolfatto, Hendry, and Moran (2008) [Are inflation expectations rational? Journal of Monetary Economics, 55, 406–422]. To use the Kalman filter as the optimal signal extraction technique, we use a convenient reformulation for the state equation by allowing expectations to play a 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 as well as to recover conditional probabilities of regime change. Empirical evidence on the US monetary policy making is provided for the period covering 1986-Q1 to 2021-Q2. 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: Taylor rule; monetary shocks; Kalman filter; particle filter (search for similar items in EconPapers)
JEL-codes: C22 F31 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://doi.org/10.1515/econ-2021-0010 (text/html)

Related works:
Working Paper: Disentangling permanent and transitory monetary shocks with a non-linear Taylor rule (2018)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bpj:econoa:v:15:y:2021:i:1:p:150-162:n:8

DOI: 10.1515/econ-2021-0010

Access Statistics for this article

Economics - The Open-Access, Open-Assessment Journal is currently edited by Katharine Rockett

More articles in Economics - The Open-Access, Open-Assessment Journal from De Gruyter
Bibliographic data for series maintained by Peter Golla ().