Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/82436
Authors: 
Söderlind, Paul
Söderström, Ulf
Vredin, Anders
Year of Publication: 
2003
Series/Report no.: 
Sveriges Riksbank Working Paper Series 147
Abstract: 
Recent research suggests that commonly estimated dynamic Taylor rules augmented with a lagged interest rate imply too much predictability of interest rate changes compared with yield curve evidence. We show that this is not sufficient proof against the Taylor rule: the result could be driven by other equations of the model that the Taylor rule is embedded in. To disentangle the effects, we study the predictability of all variables in a simple model of monetary policy: inflation, the output gap, and the interest rate, and we compare with evidence from survey data and a VAR model. We find that the strongest evidence against the Taylor rule is that while it is easy to predict the variables that enter the rule, it is very hard to predict actual interest rate changes. This is consistent with usual Taylor-type rules if policy shocks are very large, but it is more likely that there are other aspects of monetary policy behaviour that are neglected by the Taylor rule.
Subjects: 
Interest rate smoothing
yield curve
survey data
VAR
in-sample overfitting
JEL: 
E52
E58
G12
Document Type: 
Working Paper

Files in This Item:
File
Size
180.28 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.