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The Use and Abuse of Taylor Rules; How Precisely Can We Estimate Them?

Robert Tchaidze and Alina Carare ()

No 05/148, IMF Working Papers from International Monetary Fund

Abstract: This paper draws attention to inconsistencies in estimating simple monetary policy rules and their implications for policy advice. We simulate a macroeconomic model with a backward reaction function similar to Taylor (1993). We estimate different versions of a policy rule, using these simulated data. Under certain circumstances, estimations document an illusionary presence of a lagged interest rate, or of forward-looking behavior. Our results are consistent with the fact that several authors found very different versions of monetary policy rules, all fitting the U.S. data well. We also survey the literature, providing a list of issues complicating practical use of Taylor rules.

Keywords: Central banks and their policies; Central banks; Monetary policy; central bank, Taylor rules, inflation, monetary policy rules, monetary economics, (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-fin, nep-mac and nep-mon
Date: 2005-07-01
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Related works:
Working Paper: The Use and Abuse of Taylor Rules: How Precisely Can We Estimate Them? (2008) Downloads
Working Paper: The Use and Abuse of Taylor Rules: How precisely can we estimate them? (2004) Downloads
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