I thank the Editor, Pok-sang Lam, and two referees for many helpful comments.
Nowcasting and the Taylor Rule
Article first published online: 24 JUL 2014
© 2014 The Ohio State University
Journal of Money, Credit and Banking
Volume 46, Issue 5, pages 1035–1055, August 2014
How to Cite
BRANCH, W. A. (2014), Nowcasting and the Taylor Rule. Journal of Money, Credit and Banking, 46: 1035–1055. doi: 10.1111/jmcb.12128
- Issue published online: 24 JUL 2014
- Article first published online: 24 JUL 2014
- Manuscript Accepted: 29 APR 2013
- Manuscript Received: 17 JAN 2012
- asymmetric loss;
- forecast uncertainty;
- monetary policy
Actual federal funds rates in the U.S. have, at times, deviated from the recommendations of a simple Taylor rule. This paper proposes a “nowcasting” Taylor rule that preserves the form of the Taylor rule but encompasses realistic assumptions on information observable to policymakers. Because contemporaneous inflation rates and output gaps are not observable at the time policy is set, policymakers must form “nowcasts.” The optimal nowcast will depend, in part, on forecast uncertainty whenever policymakers have asymmetric costs to over- and underpredicting inflation and output. Empirical evidence shows that actual policy rates are consistent with those recommended by a nowcasting Taylor rule.