DP7575 Testing the Monetary Policy Rule in the US: a Reconsideration of the Fed?s Behaviour

Author(s): Patrick Minford, Zhirong Ou
Publication Date: November 2009
Keyword(s): bootstrap simulation, indirect inference, Monetary policy, New Keynesian model, Taylor-type rules, the 'target rule', VAR, Wald statistic
JEL(s): E12, E17, E42, E52, E58
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=7575

We calibrate a standard New Keynesian model with three alternative representations of monetary policy- an optimal timeless rule, a Taylor rule and another with interest rate smoothing- with the aim of testing which if any can match the data according to the method of indirect inference. We find that the only model version that fails to be strongly rejected is the optimal timeless rule. Furthermore this version can also account for the widespread finding of apparent 'Taylor rules' and 'interest rate smoothing' in the data, even though neither represents the true monetary policy.