Federal reserve monetary policy and the non-linearity of the Taylor rule

Aziz Hayat and Sagarika Mishra

Economic Modelling, 2010, vol. 27, issue 5, 1292-1301

Abstract: We propose and estimate a generalized Taylor rule for the monetary policy of the US Federal Reserve (Fed) to find out how the Fed funds rate is sensitive to changes in inflation and output gap variables in the post war period. We find that Fed's monetary policy has only reacted significantly to changes in inflation when they were between approximately 6.5-8.5%. However, the policy stance change on these changes was relatively small. The findings suggest that the US Fed has been too averse to change from its current monetary policy stance, and that it has not reacted noticeably to changes in the US economic activity, as measured by the output gap. The generalized functional form for the monetary policy rule suggests that similar non-linearity exists in the directional change of the Fed rate.

Keywords: Monetary; policy; rule; Taylor; rule; Semi-parametric; estimation; US; Fed; rate (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (22)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:27:y:2010:i:5:p:1292-1301

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