Reassessing Taylor Rules Using Improved Housing Rent Data

Abstract

There is a debate whether the federal funds rate deviated from the Taylor rule. We present evidence that standard inflation measures do not reflect the contemporaneous state of housing rents, which is a large part of consumption. Using a new housing rent index (RRI) developed by Ambrose et al. (2015), we compute the RRI-based Taylor rule for the period from 2000 to 2010. The modified Taylor rule indicates that seemingly large deviations are better understood as delays due to the stale information regarding housing rents. It also provides a justification for Quantitative Easing and a better alternative to other versions of Taylor rules.

Keywords: monetary policy, federal funds rate, Taylor rule, Personal Consumption Expenditures, inflation measures, housing rent

JEL Classification: E52, R31, C43, C82