Has U.S. Monetary Policy Tracked the Efficient Interest Rate?

Vasco Cúrdia, Andrea Ferrero, Ging Cee Ng and Andrea Tambalotti

No 2014-12, Working Paper Series from Federal Reserve Bank of San Francisco

Abstract: Interest rate decisions by central banks are universally discussed in terms of Taylor rules, which describe policy rates as responding to inflation and some measure of the output gap. We show that an alternative specification of the monetary policy reaction function, in which the interest rate tracks the evolution of a Wicksellian efficient rate of return as the primary indicator of real activity, fits the U.S. data better than otherwise identical Taylor rules. This surprising result holds for a wide variety of specifications of the other ingredients of the policy rule and of approaches to the measurement of the output gap. Moreover, it is robust across two different models of private agents? behavior.

Keywords: U.S. monetary policy; interest rate rules; DSGE models; Bayesian model comparison (search for similar items in EconPapers)
JEL-codes: C11 E43 E58 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2014-05-08
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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Citations: View citations in EconPapers (4)

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Journal Article: Has U.S. monetary policy tracked the efficient interest rate? (2015)
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DOI: 10.24148/wp2014-12

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