Modeling changes in US monetary policy with a time-varying nonlinear Taylor rule

Anh Nguyen, Efthymios Pavlidis and David Peel

Studies in Nonlinear Dynamics & Econometrics, 2018, vol. 22, issue 5, 17

Abstract: The monetary economics literature has highlighted four issues that are important in evaluating US monetary policy since the late 1960s: (i) time variation in policy parameters, (ii) asymmetric preferences, (iii) real-time nature of data, and (iv) heteroskedasticity. In this paper, we exploit advances in sequential monte carlo methods to estimate a time-varying nonlinear Taylor rule that addresses these four issues simultaneously. Our findings suggest that US monetary policy has experienced substantial changes in terms of both the response to inflation and to real economic activity, as well as changes in preferences. These changes cannot be captured adequately by a single structural break at the late 1970s, as has been commonly assumed in the literature, and play a non-trivial role in economic performance.

Keywords: asymmetric objective; monetary policy rules; particle filter; real-time data; stochastic volatility; Taylor rule; time-varying parameter model (search for similar items in EconPapers)
JEL-codes: C32 E52 E58 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (1)

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DOI: 10.1515/snde-2017-0092

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