Is the Taylor Rule Missing? A Statistical Investigation

39 Pages Posted: 4 May 2005

See all articles by Helle Bunzel

Helle Bunzel

Iowa State University - Department of Economics

Walter Enders

University of Alabama - Department of Economics, Finance and Legal Studies

Date Written: May 1, 2005

Abstract

We conduct a fairly thorough statistical analysis of the empirical foundations for the existence of a Taylor rule. Inflation, the output gap and the federal funds rate appear to be non-stationary variables that are not cointegrated. Although this lack of cointegration could be caused by missing variables or structural breaks, we are unable to 'salvage' the rule using several plausible candidate variables and break dates. We also investigate the possibility that the Taylor rule should be modeled as a non-linear relationship. We find that a simple threshold model makes significant progress towards rectifying some of the shortcomings of the standard model.

Keywords: Taylor rule, interest rate

JEL Classification: E4, E5, C1

Suggested Citation

Bunzel, Helle and Enders, Walter, Is the Taylor Rule Missing? A Statistical Investigation (May 1, 2005). Available at SSRN: https://ssrn.com/abstract=714546 or http://dx.doi.org/10.2139/ssrn.714546

Helle Bunzel (Contact Author)

Iowa State University - Department of Economics ( email )

260 Heady Hall
Ames, IA 50011
United States

Walter Enders

University of Alabama - Department of Economics, Finance and Legal Studies ( email )

P.O. Box 870244
200 Alston Hall
Tuscaloosa, AL 35487
United States
205-348-8972 (Phone)
205-348-0590 (Fax)

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