Understanding the Deviations of the Taylor Rule: A New Methodology with an Application to Australia

38 Pages Posted: 18 Dec 2014 Last revised: 19 Dec 2014

See all articles by Kerry Hudson

Kerry Hudson

University of Tasmania, Tasmanian School of Business and Economics

Joaquin Vespignani

University of Tasmania - School of Economics and Finance

Date Written: December 1, 2014

Abstract

This investigation aims to explain and quantify the deviations of the Taylor Rule. A novel three-step econometric procedure designed to reflect the data-rich environment in which central banks operate is proposed using information for 229 macroeconomic series. This procedure can be applied to data for any economy with inflation targeting monetary rule. Our application with Australian data shows that approximately 65% of Australia’s deviation from the Taylor Rule can be explained systematically, with international factors and a domestic factor accounting for 41.9% and 22.5% respectively of the total variation in deviation from the rule. Australian deviation from the Taylor Rule is also associated with the deviation of the US´s Taylor Rule, indicating that the Reserve Bank of Australia appears to be following an international monetary policy trend set forth by the world’s largest economy.

Keywords: Taylor Rule, Monetary Policy, Small Open Economy

JEL Classification: E40, E52, E50

Suggested Citation

Hudson, Kerry and Vespignani, Joaquin, Understanding the Deviations of the Taylor Rule: A New Methodology with an Application to Australia (December 1, 2014). CAMA Working Paper No. 78/2014. Available at SSRN: https://ssrn.com/abstract=2539342 or http://dx.doi.org/10.2139/ssrn.2539342

Kerry Hudson

University of Tasmania, Tasmanian School of Business and Economics ( email )

Commerce Building,
Sandy Bay Campus
Sandy Bay, TAS, Tasmania 7005
Australia

Joaquin Vespignani (Contact Author)

University of Tasmania - School of Economics and Finance ( email )

Commerce Building,
Sandy Bay Campus
Sandy Bay, TAS, Tasmania 7005
Australia

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
36
Abstract Views
302
PlumX Metrics