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Believe It or Not: Taylor Rule Uncertainty

Developments in Macro-Finance Yield Curve Modelling, edited by Jagjit S. Chadha, Alain Durré, Michael A. S. Joyce, Lucio Sarno, 2013

38 Pages Posted: 3 Apr 2013 Last revised: 19 Oct 2014

Andrea Buraschi

The University of Chicago; Imperial College Business School; Centre for Economic Policy Research (CEPR)

Andrea Carnelli

Imperial College London

Paul Whelan

Copenhagen Business School

Date Written: March 1, 2013

Abstract

This paper studies the private sector’s perception of US monetary policy under the assumption that agents believe in a Taylor rule. We estimate agent specific Taylor rules on a unique dataset of macroeconomic forecasts from 1986 to 2011, and analyze time and state dependence in the perceived stance of the Central Bank. First, we uncover substantial time variation in the perception of how monetary policy is conducted. Second, we find that disagreement about the parameters of the rule and their associated uncertainty co-move. Third, we find that the policy rule in the mind of agents is both non-linear and state-dependent, and that dispersion in forecasts about future Fed funds rates is highly correlated with model uncertainty. Finally, we perform a three way decomposition of ‘policy uncertainty’ and find that uncertainty about arguments and deviations from the rule are important drivers for Treasury variance risk.

Keywords: Monetary Policy, Taylor Rules, Uncertainty, Differences in Beliefs

JEL Classification: D9, E3, E4, G12

Suggested Citation

Buraschi, Andrea and Carnelli, Andrea and Whelan, Paul, Believe It or Not: Taylor Rule Uncertainty (March 1, 2013). Developments in Macro-Finance Yield Curve Modelling, edited by Jagjit S. Chadha, Alain Durré, Michael A. S. Joyce, Lucio Sarno, 2013. Available at SSRN: https://ssrn.com/abstract=2242752 or http://dx.doi.org/10.2139/ssrn.2242752

Andrea Buraschi

The University of Chicago ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
7738347123 (Phone)

HOME PAGE: http://www.andreaburaschi.com/

Imperial College Business School ( email )

South Kensington Campus
Exhibition Road
London SW7 2AZ, SW7 2AZ
United Kingdom

HOME PAGE: http://www.andreaburaschi.com/

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Andrea Carnelli

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

Paul Whelan (Contact Author)

Copenhagen Business School ( email )

Copenhagen Business School
Finance Department
Copenhagen, DC 1854
Denmark

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