Predicting Changes in the Interest Rate: The Performance of Taylor Rules Versus Alternatives for the United Kingdom

Tae-Hwan Kim (), Thanaset Chevapatrakul and Paul Mizen

No 122, Royal Economic Society Annual Conference 2003 from Royal Economic Society

Abstract: We consider an experiment where we use the Taylor rule information set, inflation and the output gap, to predict the next change in monetary policy for the United Kingdom 1992 - 2000. To do this we use a limited dependent variable approach, where the next rate change could be `upwards', `downwards' or `no change'. A Multinomial Logit model is used to predict the next most likely change using monthly data, and these predictions are compared to the actual outturn. Against this hypothesis we compare a wider information set including more than just inflation and output gap variables. The in-sample and out-of-sample prediction tests are evaluated using forecast performance tests.

Keywords: The Taylor rule; monetary policy; directional forecast (search for similar items in EconPapers)
JEL-codes: E5 (search for similar items in EconPapers)
Date: 2003-06-04
New Economics Papers: this item is included in nep-dcm and nep-mon
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