Implicit Quantile Preferences of the Fed and the Taylor Rule

Gabriel Montes-Rojas, Fernando Toledo, Nicolás Bertholet () and Kevin Corfield
Additional contact information
Gabriel Montes-Rojas: IIEP-UBA/CONICET
Fernando Toledo: UNLP
Kevin Corfield: UBA

No 384, Working Papers from Red Nacional de Investigadores en Economía (RedNIE)

Abstract: We study optimal monetary policy when a central bank maximizes a quantile utility objective rather than expected utility. In our framework, the central bank’s risk attitude is indexed by the quantile index level, providing a transparent mapping between hawkish/dovish stances and attention to adverse macroeconomic realizations. We formulate the infinite-horizon problem using a Bellman equation with the quantile operator. Implementing a Euler-equation approach, we get Taylor-rule-type reaction functions. Using an indirect inference approach, we derive an implicit quantile index of central bank risk aversion. An empirical implementation for the US is outlined based on reduced-form laws of motion with conditional heteroskedasticity, enabling estimation of the new monetary policy rule and its dependence on the Fed risk attitudes. The results reveal that the Fed has mostly a dovish-type behavior but with some periods of hawkish attitudes.

Keywords: Taylor rule; inflation; output gap; quantile preferences; dynamic programming; recursive model. (search for similar items in EconPapers)
JEL-codes: C22 C61 E52 E58 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2026-01
New Economics Papers: this item is included in nep-mon
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https://rednie.eco.unc.edu.ar/files/DT/384.pdf (application/pdf)

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Working Paper: Implicit quantile preferences of the Fed and the Taylor rule (2025)
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Persistent link: https://EconPapers.repec.org/RePEc:aoz:wpaper:384

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