Working
Papers

(with Alex Nikolsko-Rzhevskyy and Ruxandra Prodan),

We use tests for structural change to identify periods of
low, positive, and negative Taylor rule deviations, the difference between the
federal funds rate and the rate prescribed by the original Taylor rule. The
tests define four monetary policy eras: a negative deviations era during the
Great Inflation from 1965 to 1979, a positive deviations era during the Volcker
disinflation from 1979 to 1987, a low deviations era during the Great
Moderation from 1987 to 2000, and another negative deviations era from 2001 to
2014. We then estimate Taylor rules for the different eras. The most important
violations of the Taylor principles, the four elements that comprise the Taylor
rule, are that the coefficient on inflation was too low during the Great
Inflation and that the coefficient on the output gap was too low during the
Volcker disinflation. We then analyze deviations from several alterations of
the original Taylor rule, which identify a negative deviations era from 2000 to
2007 and a low deviations era from 2007 to 2014. Between 2000 and 2007, Fed
policy cannot be explained by any variant of the Taylor rule while, between
2007 and 2014, Fed policy is consistent with a rule where the federal funds
rate does not respond at all to inflation and either responds very strongly to
the output gap or incorporates a time-varying equilibrium real interest rate. (May
2015)

(Taylor) Rules versus
Discretion in U.S. Monetary Policy

(with Alex
Nikolsko-Rzhevskyy and Ruxandra Prodan)

The
Taylor rule has been the dominant metric for monetary policy evaluation over
the past 20 years, and it has become common practice to identify periods where
policy either adheres closely to or deviates from the Taylor rule benchmark. The
purpose of this paper is to identify (Taylor) rules-based and discretionary
eras solely from the data so that knowledge of subsequent economic outcomes cannot
influence the choice of the dates. We define Taylor rules-based and
discretionary eras by smaller and larger Taylor rule deviations, the absolute
value of the difference between the actual federal funds rate and the federal
funds rate prescribed by the original Taylor rule, and use tests for multiple
structural changes and Markov switching models to identify the eras. Monetary
policy in the U.S. is characterized by a Taylor rules-based (low deviations)
era until 1974, a discretionary (high deviations) era from 1974 to about 1985,
a rules-based era from about 1985 to 2000, and a discretionary era from 2001 to
2013. The Taylor rule deviations are about three times as large in the
discretionary eras than in the rules-based eras. The discretionary and
rules-based eras closely correspond to periods where the Taylor rule deviations
are above and below two percent. We calculate various loss functions and find
that economic performance is uniformly better during (Taylor) rules-based eras
than during discretionary eras.
(January 2015)

Real-Time
Historical Analysis of Monetary Policy Rules

(with Alex Nikolsko-Rzhevskyy)

The size of the output gap
coefficient is the key determinant of whether quantitative easing since 2009
and continued near-zero interest rates can by justified by a Taylor rule. Fed
Chair Ben Bernanke and Vice-Chair Janet Yellen have argued that John Taylor
proposed a monetary policy rule with a larger output gap coefficient in his
1999 paper than in his 1993 paper, and have used this argument to justify
negative prescribed interest rates in 2009-2010 and near-zero interest rates
through 2015. While Taylor neither proposed nor advocated a different rule in
1999 than in 1993, he did not draw a distinction between the implications of
the two rules. In accord with common practice at the time, Taylor used revised
data. We show that, using real-time data available to policymakers (although
not to Taylor when he wrote the paper), there is a sharp difference in the
implications of rules with a smaller and a larger output gap coefficient. If John Taylor had been able to use real-time data in
his 1999 paper, the importance of the distinction between Taylor’s original
rule with a smaller output gap coefficient and other rules with a larger
coefficient would have been evident much earlier. (May 2013)

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