Evaluating the Taylor Principle Over the Distribution of the Interest Rate: Evidence from the US, UK and Japan

Paul Mizen, Tae-Hwan Kim () and Alan Thanaset
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Alan Thanaset: University of Nottingham

No 51, Money Macro and Finance (MMF) Research Group Conference 2006 from Money Macro and Finance Research Group

Abstract: Support for the Taylor principle is considerable but the focus of empirical investigation has been on estimated coefficients at the mean of the interest rate distribution. We offer a new approach that estimates the response of interest rates to inflation and the output gap at various points (quantiles) on the conditional distribution corresponding to different levels of interest rates. We find support for the Taylor principle at all but low rates in normal times for the US and the UK, but an increasingly aggressive (nonlinear) response to inflation as rates increase. This is robust to the inflation horizon, instrument choice and use of a real time output gap data. In abnormal times, described by events in Japan, we find strong support for the Taylor principle, and increasing aggression to inflation when rates increase. We confirm that increasing aggression towards inflation can be observed as interest rates approach zero. The results have implications for the modeling of economies when inflation is very low, and provides some insights into Japanese monetary policy in particular

Keywords: Taylor Principle; policy rules; quantile regression; low inflation; Japan (search for similar items in EconPapers)
JEL-codes: E42 E52 (search for similar items in EconPapers)
Date: 2007-02-02
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Working Paper: Evaluating the Taylor Principle Over the Distribution of the Interest Rate: Evidence from the US, UK and Japan (2007)
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Persistent link: https://EconPapers.repec.org/RePEc:mmf:mmfc06:51

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