Targets in the Taylor Rule: Inflation, Speed Limit, or Price Level?

15 Pages Posted: 19 Jan 2013

See all articles by Pavel S. Kapinos

Pavel S. Kapinos

Federal Reserve Bank of Dallas--Financial Industry Studies

Michael S. Hanson

Bank of America

Multiple version iconThere are 2 versions of this paper

Date Written: January 2013

Abstract

This paper explores the link between alternative targets in the Taylor rule and their empirical fit using real‐time U.S. macroeconomic data. We first study the stabilizing properties of the classical Taylor rule (inflation targeting, IT) and add either a price‐level target (PLT) or output gap quasigrowth target (speed‐limit targeting, SLT) in the context of the standard New Keynesian model. We demonstrate that, although only SLT has the same functional form as the optimal interest‐rate reaction function, both PLT and SLT stabilize the model macroeconomy against a cost‐push shock for a wide range of parameter values better than IT. We then estimate all three specifications using the Greenbook data. We find much stronger support for SLT than PLT and discuss pitfalls in estimating the latter that are present in existing literature.

JEL Classification: E52, E58

Suggested Citation

Kapinos, Pavel S. and Hanson, Michael S., Targets in the Taylor Rule: Inflation, Speed Limit, or Price Level? (January 2013). Contemporary Economic Policy, Vol. 31, Issue 1, pp. 176-190, 2013, Available at SSRN: https://ssrn.com/abstract=2203219 or http://dx.doi.org/10.1111/j.1465-7287.2011.00270.x

Pavel S. Kapinos (Contact Author)

Federal Reserve Bank of Dallas--Financial Industry Studies ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States

HOME PAGE: http://https://sites.google.com/site/pavelkapinos/

Michael S. Hanson

Bank of America ( email )

100 North Tryon Street
6th Floor
Charlotte, NC 28255
United States

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