Nonlinearity and structural breaks in monetary policy rules with stock prices

Dong Jin Lee and Jong Chil Son ()

Economic Modelling, 2013, vol. 31, issue C, 1-11

Abstract: This paper introduces nonlinearity and a structural break to the US forward-looking Taylor rule with a stock price gap, thereby alleviating the robustness problem that the linear Taylor rule is sensitive to minor changes of the sample period since 1991. The path of the time-varying inflation coefficient shows that, unlike in the linear model, the Fed consistently responds to inflationary pressures in an aggressive manner even after 1991. The stock price coefficient stays positive since 1991. However, its time-varying pattern does not show active responses in the early periods of stock price hikes, which is counter to the view that the Fed has preemptively reacted to stock price bubbles.

Keywords: Monetary policy rule; Nonlinear model; Stock market; Structural break; Time-varying coefficient (search for similar items in EconPapers)
JEL-codes: E31 E44 E52 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

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Working Paper: Nonlinearity and Structural Breaks in Monetary Policy Rules with Stock Prices (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:31:y:2013:i:c:p:1-11

DOI: 10.1016/j.econmod.2012.10.018

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