Econometric Issues
Taylor Rules: Background and Estimates
- Robert M. Solow and John B. Taylor, "Inflation, Unemployment, and Monetary Policy," MIT Press, 1998.
- Richard Clarida, Jordi Gali, and Mark Gertler, "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, v. 37, n. 4, December 1999, pp. 1661–1707.
Taylor (1993) (optional, see below) started an enormous literature on estimating simple "policy rules" or guidelines. (Simple enough to fit on a business card!) In section 4 of chapter 2, Taylor (1998) discusses some aspects of his view of these policy rules and critiques by others; see also the comments by Friedman (pp. 60-63) and Poole (pp. 79-81), and Taylor's reply on pages 95-105.
Clarida, et al. (1999) discuss the estimation of Taylor's original rule as well as "forward-looking" versions as in their 2000 Quarterly Journal of Economics article. (Read sections I to III and the conclusion of this latter article.) We will estimate some of these models in lecture, using a statistical technique called "generalized method of moments" (or GMM), and interpret the results. Included in the optional reading below is a introduction to the GMM method by Wooldridge (2001), for those interested.
- John B. Taylor, "Discretion versus Policy Rules in Practice," Carnegie-Rochester Conference Series on Public Policy, v. 39, 1993, pp. 195–214.
- Richard Clarida, Jordi Gali, and Mark Gertler, "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory", Quarterly Journal of Economics, v. 115, n. 1, February 2000, pp. 147–180.
- Wooldridge, Jeffrey M. "Applications of Generalized Method of Moments Estimation," Journal of Economic Perspectives, v. 15, n. 4, Fall 2001, pp. 87–100.
Perspectives on Taylor Rules
- Robert L. Hetzel, "The Taylor Rule: Is It a Useful Guide for Understanding Monetary Policy?" Federal Reserve Bank of Richmond Economic Quarterly, v. 86, n. 2, Spring 2000, pp. 1–33.
- Michael Woodford, "The Taylor Rule and Optimal Monetary Policy," Princeton University working paper, January 2001.
Hetzel (2000) offers a skeptical view of the widespread use of Taylor Rules for analyzing monetary policy. Woodford (2001) offers some analysis on the ways in which the Taylor Rule does — or does not — coincide with a rule derived from a model of optimal monetary policy.
For additional prespectives on the relationship between the Taylor Rule and the behavior of the Fed, see the articles below. (Optional reading.)
- Charles T. Carlstrom and Timothy S. Fuerst, "The Taylor Rule: A Guidepost for Monetary Policy?," Federal Reserve Bank of Cleveland Economic Commentary, July, 2003.
- John P. Judd and Glenn D. Rudebusch, "Describing Fed Behavior," Federal Reserve Bank of San Fransisco Economic Letter 98-38, December 1998.
Vector Autoregressive Models of Monetary Policy
- James H. Stock and Mark W. Watson, "Vector Autoregressions," Journal of Economic Perspectives, v. 15, n. 4, Fall 2001, pp. 101–115.
Vector Autoregressions (VARs) are among the most popular empirical tools used for quantifying the effects of monetary policy (and other shocks) in a macroeconomic setting. Stock and Watson (2001) provide a readable explanation of how VARs are used and interpreted. Zha (1997) provides a more in-depth discussion of the challenges of properly identifying and measuring the effects of monetary policy. (Optional reading.)
- "Identifying Monetary Policy: A Primer," Federal Reserve Bank of Atlanta Economic Review, v. 82, n. 2, Second Quarter 1997, pp. 26–43.