Taylor rule estimation by OLS

Carlos Carvalho, Fernanda Nechio and Tiago Tristão

Journal of Monetary Economics, 2021, vol. 124, issue C, 140-154

Abstract: We argue for Ordinary Least Squares (OLS) estimation of Taylor rules despite an endogeneity bias. To that end, we show analytically in the three-equation New Keynesian model that the OLS bias is proportional to the fraction of the variance of regressors due to monetary shocks. Using simulations, we show this relationship also holds in a quantitative model of the U.S. economy. Since monetary shocks explain only a small fraction of the variance of typical Taylor rule regressors, the bias tends to be small. Estimating a standard Taylor rule using U.S. data, we find quite similar OLS and Instrumental Variables estimates.

Keywords: Taylor rule; OLS; GMM; Endogeneity bias; Weak instruments; New Keynesian models (search for similar items in EconPapers)
JEL-codes: E47 E50 E51 E52 E58 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (34)

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Working Paper: Taylor Rule Estimation by OLS (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:124:y:2021:i:c:p:140-154

DOI: 10.1016/j.jmoneco.2021.10.010

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