The Influence of the Taylor Rule on US Monetary Policy

34 Pages Posted: 13 Nov 2013

See all articles by Pelin Ilbas

Pelin Ilbas

National Bank of Belgium - Research Department

Øistein Røisland

Norges Bank - Department of Economics

Tommy Sveen

Norges Bank - Research Department

Date Written: January 18, 2013

Abstract

We analyze the influence of the Taylor rule on US monetary policy by estimating the policy preferences of the Fed within a DSGE framework. The policy preferences are represented by a standard loss function, extended with a term that represents the degree of reluctance to letting the interest rate deviate from the Taylor rule. The empirical support for the presence of a Taylor rule term in the policy preferences is strong and robust to alternative specifications of the loss function. Analyzing the Fed's monetary policy in the period 2001-2006, we find no support for a decreased weight on the Taylor rule, contrary to what has been argued in the literature. The large deviations from the Taylor rule in this period are due to large, negative demand-side shocks, and represent optimal deviations for a given weight on the Taylor rule.

Keywords: optimal monetary policy, simple rules, central bank preferences

JEL Classification: E42, E52, E58, E61, E65

Suggested Citation

Ilbas, Pelin and Røisland, Øistein and Sveen, Tommy, The Influence of the Taylor Rule on US Monetary Policy (January 18, 2013). Norges Bank Working Paper 2013 | 04. Available at SSRN: https://ssrn.com/abstract=2353351 or http://dx.doi.org/10.2139/ssrn.2353351

Pelin Ilbas (Contact Author)

National Bank of Belgium - Research Department ( email )

Research Department
Boulevard de Berlaimont 14
B-1000 Brussels, 1000
Belgium

Øistein Røisland

Norges Bank - Department of Economics ( email )

P.O. Box 1179
Oslo, N-0107
Norway
+47 22 31 67 39 (Phone)
+47 22 31 60 50 (Fax)

Tommy Sveen

Norges Bank - Research Department ( email )

P.O. Box 1179
Oslo, N-0107
Norway

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