Working
Papers

Taylor’s Rule versus Taylor Rules

(with Alex
Nikolsko-Rzhevskyy)

Does the Taylor rule prescribe negative interest
rates for 2009-2011? This question is important because negative prescribed
interest rates provide a justification for quantitative easing once actual
policy rates hit the zero lower bound. We answer the question by analyzing Fed
policy following the recessions of the early-to-mid 1970s, the early 1990s, and
the early 2000s in the context of both *International
Finance*

Markov
Switching and the Taylor Principle

(with Chris Murray and Alex
Nikolsko-Rzhevskyy)

Early research on
the *Macroeconomic Dynamics*

Time Series Tests of Constant Steady-State
Growth

(with Ruxandra Prodan)

We propose a new methodology to study the stability of
steady-state growth. Long-run GDP per capita can be characterized by: (1) the *linear trend hypothesis*, where there are
no long-run changes in GDP levels or growth rates, (2) the *level shift hypothesis*, where there are long-run level shifts, but
not changes in growth rates, and (3) the *growth
shift hypothesis*, where there are long-run changes in both GDP levels and
growth rates. We formally test these hypotheses using time series techniques
with over 135 years of data. The results are not favorable to the hypothesis of
constant steady-state growth. While we find evidence supporting the *linear trend hypothesis* for the *level shift hypothesis* for three additional OECD countries, the *growth shift hypothesis* is supported for
seven OECD and four Asian countries. The results are not driven by transition
dynamics. (August 2012)

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)

(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
2008. The Taylor rule deviations are about three times as large in the
discretionary eras than in the rules-based eras and are almost four
times larger in the most discretionary era (1974 to 1984) than in the least
discretionary era (1985 to 2000). With
the Markov switching models, which allow for regime changes at the beginning
and end of the sample, we also identify a discretionary era from 1965 to 1968
and a rules-based era in 2006 and 2007. The discretionary and rules-based eras
closely correspond to periods where the Taylor rule
deviations are above and below two percent. (July 2013)

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