Testing the Monetary Policy Rule in the US: A Reconsideration of the Fed's Behaviour

51 Pages Posted: 11 Jan 2010

See all articles by Patrick Minford

Patrick Minford

Cardiff University Business School; Centre for Economic Policy Research (CEPR)

Zhirong Ou

Cardiff University - Cardiff Business School

Date Written: November 2009

Abstract

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.

Keywords: bootstrap simulation, indirect inference, Monetary policy, New Keynesian model, Taylor-type rules, the 'target rule', VAR, Wald statistic

JEL Classification: E12, E17, E42, E52, E58

Suggested Citation

Minford, Patrick and Ou, Zhirong, Testing the Monetary Policy Rule in the US: A Reconsideration of the Fed's Behaviour (November 2009). CEPR Discussion Paper No. DP7575. Available at SSRN: https://ssrn.com/abstract=1533180

Patrick Minford (Contact Author)

Cardiff University Business School ( email )

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Centre for Economic Policy Research (CEPR)

London
United Kingdom

Zhirong Ou

Cardiff University - Cardiff Business School

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