The Taylor Rule and 'Opportunistic' Monetary Policy

CREATES Research Paper No. 2010-4

36 Pages Posted: 27 Jan 2010

See all articles by Helle Bunzel

Helle Bunzel

Iowa State University - Department of Economics

Walter Enders

University of Alabama - Department of Economics, Finance and Legal Studies

Date Written: January 27, 2010

Abstract

We investigate the possibility that the Taylor rule should be formulated as a threshold process such that the Federal Reserve acts more aggressively in some circumstances than in others. It seems reasonable that the Federal Reserve would act more aggressively when inflation is high than when it is low. Similarly, it might be expected that the Federal Reserve responds more to a negative than a positive output gap. Although these specifications receive some empirical support, we find that a modified threshold model that is consistent with “opportunistic” monetary policy makes significant progress towards explaining Federal Reserve behavior.

Keywords: Threshold regression, Nonlinear Taylor rule, Opportunistic Monetary Policy

JEL Classification: C22, E32, E52

Suggested Citation

Bunzel, Helle and Enders, Walter, The Taylor Rule and 'Opportunistic' Monetary Policy (January 27, 2010). CREATES Research Paper No. 2010-4, Available at SSRN: https://ssrn.com/abstract=1543058 or http://dx.doi.org/10.2139/ssrn.1543058

Helle Bunzel (Contact Author)

Iowa State University - Department of Economics ( email )

260 Heady Hall
Ames, IA 50011
United States

Walter Enders

University of Alabama - Department of Economics, Finance and Legal Studies ( email )

P.O. Box 870244
200 Alston Hall
Tuscaloosa, AL 35487
United States
205-348-8972 (Phone)
205-348-0590 (Fax)

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