The Use and Abuse of Taylor Rules: How precisely can we estimate them?

Robert Tchaidze and Alina Carare ()

No 132, Econometric Society 2004 Latin American Meetings from Econometric Society

Abstract: This paper surveys the economic literature on simple policy rules and analyzes econometric methods used to estimate them, emphasizing effects of model misspecification. We draw attention to inconsistencies in evaluation of the rules and implications for policy advice, which is commonly done based on benchmark rules that could be improperly estimated, or selected for a wrong reason. We simulate a simple macroeconomic model with an interest rate obtained from a simple policy reaction function similar to Taylor (1993). We estimate different versions of the simple policy rule, using the simulated data. Estimations document illusionary presence of extra variables, such as lagged interest rate, output gap growth, and inflation differential; or claim the policy function to be forward looking. Length of the sample or ignorance of real time data errors do not seem to have significant impact on the results.

Keywords: monetary policy rules; central bank; monetary policy; Taylor rules (search for similar items in EconPapers)
JEL-codes: E52 E58 (search for similar items in EconPapers)
Date: 2004-08-11
New Economics Papers: this item is included in nep-mon
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Citations: View citations in EconPapers (15)

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Persistent link: https://EconPapers.repec.org/RePEc:ecm:latm04:132

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