Asset Price Momentum and Monetary Policy: Time Varying Parameter Estimation of Taylor Rules

19 Pages Posted: 2 Nov 2013

See all articles by Ramaprasad Bhar

Ramaprasad Bhar

UNSW Business School, Risk and Actuarial Studies

A. (Tassos) G. Malliaris

Loyola University of Chicago - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: September 17, 2013

Abstract

In this paper we consider two new independent variables as inputs to the Taylor Rule. These are the equity and housing momentum variables and are introduced to investigate the potential usefulness of these two variables in guiding the Fed to lean against potential bubbles. Such effectiveness cannot adequately be evaluated if the Taylor Rule estimation follows the standard regression methodology that has been criticized in the literature to be econometrically incorrect. Using a time varying parameter estimation methodology we find that equity momentum as an input in the Taylor Rule does not contribute to changes in Fed Funds. However, the housing momentum plays an important role econometrically and can be a useful tool in setting Fed Funds rates.

Keywords: Monetary policy rule, Nonlinear model, Stock market, Housing market, Time-varying coefficient

JEL Classification: C22, E44, G12

Suggested Citation

Bhar, Ramaprasad and Malliaris, A. (Tassos) G., Asset Price Momentum and Monetary Policy: Time Varying Parameter Estimation of Taylor Rules (September 17, 2013). Available at SSRN: https://ssrn.com/abstract=2348371 or http://dx.doi.org/10.2139/ssrn.2348371

Ramaprasad Bhar

UNSW Business School, Risk and Actuarial Studies ( email )

Sydney, NSW 2052
Australia

A. (Tassos) G. Malliaris (Contact Author)

Loyola University of Chicago - Department of Economics ( email )

16 E. Pearson Ave
Quinlan School of Business
Chicago, IL 60611
United States
312-915-6063 (Phone)

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