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TAYLOR RULE AND DISCRETIONARY REGIMES IN THE UNITED STATES: EVIDENCE FROM A k-STATE MARKOV REGIME-SWITCHING MODEL

Published online by Cambridge University Press:  01 August 2016

Joseph D. Alba  and
Peiming Wang
Joseph D. Alba*
Affiliation:
Nanyang Technological University
Peiming Wang
Affiliation:
Auckland University of Technology
*
Address correspondence to: Joseph D. Alba, HSS-04-79, School of Humanities and Social Sciences, Nanyang Technological University, Singapore639798; e-mail: [email protected].
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Abstract

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We examine U.S. monetary policies from 1973 to 2014 with the Taylor rule as a benchmark by utilizing a k-state Markov regime-switching model in which the number and the periods of the regimes are endogenously determined. The model relates the federal funds rate to real time output gaps and inflation forecast. It endogenously identifies the periods of Taylor rule regime and discretionary regimes, consistent with the U.S. experience. The Taylor rule regime also coincides with periods of lower variability in inflation and in real GDP growth.

Keywords

Markov ModelTaylor Rule
Type
Articles
Information
Macroeconomic Dynamics , Volume 21 , Issue 3 , April 2017 , pp. 817 - 833
Copyright
Copyright © Cambridge University Press 2016 

Footnotes

We are grateful to two anonymous referees for their helpful comments.

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