How effective is the Taylor rule? Some insights from the time-frequency domain

Patrick Crowley and David Hudgins

No 1/2020, BoF Economics Review from Bank of Finland

Abstract: When the central bank sets monetary policy according to a conventional or modified Taylor rule (which is known as the Taylor Principle), does this deliver the best outcome for the mac-roeconomy as a whole? This question is addressed by extending the wavelet-based control (WBC) model of Crowley and Hudgins (2015) to evaluate macroeconomic performance when the central bank sets interest rates based on a conventional or modified Taylor rule (TR). We compare the simulated performance of jointly optimal fiscal and monetary policy under an unrestricted baseline model with performance under the TR. We simulate the model un-der relatively small and large weighting of the output gap in the TR specification, and for both low and high inflation environments. The results show that the macroeconomic outcome de-pends on whether the conventional or modified Taylor rule is used, and whether the central bank is operating in a low or high inflation environment.

Keywords: Discrete Wavelet Analysis; Monetary Policy; Optimal Control (search for similar items in EconPapers)
JEL-codes: C61 C63 C88 E52 E61 F47 (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-cba, nep-cmp, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.econstor.eu/bitstream/10419/214875/1/1691728837.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:zbw:bofecr:12020

Access Statistics for this paper

More papers in BoF Economics Review from Bank of Finland Contact information at EDIRC.
Bibliographic data for series maintained by ZBW - Leibniz Information Centre for Economics ().