Monetary Policy Estimation in Real Time: Forward-Looking Taylor Rules without Forward-Looking Data

Authors


  • I am highly grateful to my advisor, David Papell, for his guidance and valuable suggestions. I am thankful to Olivier Coibion, Dean Croushore, Adriana Fernandez, Andrew Hussey, David Kemme, Chris Murray, Tanya Molodtsova, Simon van Norden, Elena Pesavento, Jeremy Piger, Ruxandra Prodan, Tara Sinclair, William Smith, and participants at presentations at the inline image Midwest Econometrics Group Meeting, inline image Annual Meetings of the Southern Economic Association, Fordham University, and Emory University for helpful comments and discussions. I am also grateful to the editor, Masao Ogaki, and two anonymous referees, whose constructive comments have greatly improved this article, and to Athanasios Orphanides for sharing the data.

Abstract

I propose a methodology for estimating forward-looking Taylor rules in real time when forward-looking real-time central bank data are unavailable. The methodology consists of choosing appropriate models to closely replicate U.S. Greenbook forecasts and then applying these models to Canada, Germany, and the U.K. The results show that German and U.S. Taylor rules are characterized by inflation coefficients increasing with the forecast horizon and a positive output gap response. The U.K. and Canada interest rate reaction functions achieve maximum inflation response at middle-term horizons of about 1/2 years and the output gap coefficient is insignificant.

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