DP12553 Measuring monetary policy deviations from the Taylor rule
|Author(s):||João Madeira, Nuno Pedro G. Palma|
|Publication Date:||January 2018|
|Keyword(s):||Bayesian estimation, Business Cycles, DSGE, interest rates, New Keynesian models, sticky prices|
|JEL(s):||E32, E37, E50|
|Programme Areas:||Monetary Economics and Fluctuations|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=12553|
We estimate deviations of the federal funds rate from the Taylor rule by taking into account the endogeneity of output and inflation to changes in interest rates. We do this by simulating the paths of these variables through a DSGE model using the estimated time series for the exogenous processes except for monetary shocks. We then show that taking the endogeneity of output and inflation into account can make a significant quantitative difference (which can exceed 40 basis points) when calculating the appropriate value of interest rates according to the Taylor rule.