Keywords: Monetary policy rules, federal funds rate, Taylor rule, real-time data
Abstract: In recent years, simple policy rules have received attention as a means
to a more transparent and effective monetary policy. Often, however, the
analysis is based on unrealistic assumptions about the timeliness of
data availability. This permits rule specifications that are not
operational and ignore difficulties associated with data revisions.
This paper examines the magnitude of these informational problems
using Taylor's rule as an example. I demonstrate that the real-time
policy recommendations differ considerably from those obtained with
the ex post revised data and are revised substantially even a year
after the relevant quarter. Further, I show that estimated policy
reaction functions obtained using the ex post revised data can yield
misleading descriptions of historical policy. Using Federal Reserve
staff forecasts I show that in the 1987-1992 period simple forward-looking
specifications describe policy better than comparable Taylor-type
specifications, a fact that is largely obscured when the analysis is
based on the ex post revised data.
Full paper (650 KB PDF)
| Full paper (634 KB Postscript)
Home | Economic research and data | FR working papers | FEDS | 1998 FEDS papers
To comment on this site, please fill out our feedback form.
Last update: January 27, 1998