Measuring Monetary Policy Deviations from the Taylor Rule

33 Pages Posted: 8 Jan 2018

See all articles by Joao Madeira

Joao Madeira

University of York - Department of Economics and Related Studies

Nuno Pedro G. Palma

University of Manchester

Date Written: January 2018

Abstract

We estimate deviations of the federal funds rate from the Taylor rule by taking into account the endogeneity of output and inflation to changes in interest rates. We do this by simulating the paths of these variables through a DSGE model using the estimated time series for the exogenous processes except for monetary shocks. We then show that taking the endogeneity of output and inflation into account can make a significant quantitative difference (which can exceed 40 basis points) when calculating the appropriate value of interest rates according to the Taylor rule.

Keywords: Bayesian estimation, Business Cycles, DSGE, interest rates, New Keynesian models, sticky prices

JEL Classification: E32, E37, E50

Suggested Citation

Madeira, Joao and Palma, Nuno Pedro G., Measuring Monetary Policy Deviations from the Taylor Rule (January 2018). CEPR Discussion Paper No. DP12553, Available at SSRN: https://ssrn.com/abstract=3098129

Joao Madeira (Contact Author)

University of York - Department of Economics and Related Studies ( email )

Heslington
York, YO1 5DD
United Kingdom

Nuno Pedro G. Palma

University of Manchester ( email )

Oxford Road
Manchester, N/A M13 9PL
United Kingdom

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