The Taylor Rule and 'Opportunistic' Monetary Policy

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