Taylor Rule Asymmetries

46 Pages Posted: 2 Jan 2023

See all articles by Kiyea Jin

Kiyea Jin

University of Texas at Austin, Department of Economics

Anastasia Zervou

University of Texas at Austin

Date Written: December 17, 2022

Abstract

We study whether the Federal Reserve has been responding asymmetrically to inflation, depending on the occasion of high or low inflation expectations. Recent policy arguments motivated by the current inflation resurgence and the earlier Great Inflation experience, suggest an asymmetric central bank reaction function, where the response to inflation is more aggressive when inflation is high, relative to when inflation is low. Theoretical work by Bianchi, Melosi, and Rottner (2021) and policy arguments based on the low inflation experience and the zero lower bound (ZLB) for the interest rate, suggest an asymmetric reaction function as well, but in the opposite direction, where the response to inflation is more aggressive when inflation is low relative to when inflation is high. In this paper, we empirically investigate whether the Federal Reserve has followed any of the above recommendations, implementing asymmetric rules, and in which direction. By estimating a threshold Taylor-type rule that allows for asymmetries, we find that for the period after the 2000s, the response to expected inflationary biases is significantly stronger than the response to deflationary ones.

Keywords: Monetary policy, inflation, threshold model, inflationary bias, deflationary bias

JEL Classification: E43, E52, C24

Suggested Citation

Jin, Kiyea and Zervou, Anastasia, Taylor Rule Asymmetries (December 17, 2022). Available at SSRN: https://ssrn.com/abstract=4306256 or http://dx.doi.org/10.2139/ssrn.4306256

Kiyea Jin

University of Texas at Austin, Department of Economics ( email )

3374 Lake Austin Boulevard Apt D
Apt D
Austin, TX 78703
United States
5127729951 (Phone)

Anastasia Zervou (Contact Author)

University of Texas at Austin ( email )

6906 N Loop 1604 W
San Antonio, TX Texas 78249
United States

HOME PAGE: http://https://liberalarts.utexas.edu/economics/faculty/az7379

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