Taylor rule or optimal timeless policy? Reconsidering the Fed’s behaviour since 1982

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Minford, Patrick ; Ou, Zhirong ; Cardiff University (2010)
  • Publisher: Cardiff University
  • Subject: HB

We calibrate a standard New Keynesian model with three alternative representations of monetary policy- an optimal timeless rule, a Taylor rule and another with interest rate smoothing- with the aim of testing which if any can match the data according to the method of indirect inference. We find that the only model version that fails to be strongly rejected is the optimal timeless rule. Furthermore this version can also account for the widespread finding of apparent ‘Taylor rules’ and ‘interest rate smoothing’ in the data, even though neither represents the true monetary policy.
  • References (1)

    Nistico, Salvatore (2007), 'The Welfare Loss from Unstable Inflation', in Economics Letters, Elsevier, vol. 96(1), pages 51-57, July

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