Estimating Taylor-Type Rules: An Unbalanced Regression?

Abstract

Relying on Clive Granger's many and varied contributions to econometric analysis, this paper considers some of the key econometric considerations involved in estimating Taylor-type rules for US data. We focus on the roles of unit roots, cointegration, structural breaks, and non-linearities to make the case that most existing estimates are based on an unbalanced regression. A variety of estimates reveal that neglected cointegration results in the omission of a necessary error correction term and that Federal Reserve (Fed) reactions during the Greenspan era appear to have been asymmetric. We argue that error correction and non-linearities may be one way to estimate Taylor rules over long samples when the underlying policy regime may have changed significantly.

Citation

Siklos, P.L. and Wohar, M.E. (2006), "Estimating Taylor-Type Rules: An Unbalanced Regression?", Fomby, T.B. and Terrell, D. (Ed.) Econometric Analysis of Financial and Economic Time Series (Advances in Econometrics, Vol. 20 Part 2), Emerald Group Publishing Limited, Leeds, pp. 239-276. https://doi.org/10.1016/S0731-9053(05)20029-4