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The relative performance of alternative Taylor rule specifications
Full text linkWe look at how well several alternative Taylor rule specifications describe Federal Reserve policy decisions in real time, using the newly developed Giacomini and Rossi (2007) test for non-nested model selection in the presence of (possible) parameter instability. Further, we isolate those Taylor rule features that are most important for achieving relatively strong real-time performance. A second-order partial adjustment version of the Koenig (2004a) model performs consistently better than alternative specifications. Key features of this rule are the partial adjustment of the federal funds rate toward an equilibrium rate that depends on the unemployment rate and forward-looking inflation measures.Taylor's rule ; Real-time data ; Monetary policy - United States ; Forecasting
Monetary Policy Estimation in Real Time: Forward-Looking Taylor Rules without Forward-Looking Data
No full textThe equilibrium real exchange rate of China: a productivity approach
Full text linkA large body of theoretical and empirical works asserts that exchange rates depend upon a country's productivity growth, and this effect is dubbed the Balassa-Samuelson effect. This paper examines the evidence for a Balassa-Samuelson based explanation for the real exchange rate movements of China vis-a-vis the U.S. dollar. Using disaggregated industry level data, we construct sectoral total factor productivities (TFPs) for the tradable and nontradable sectors from 1980-2003. Our main findings are: (a) the sectoral TFP differential is cointegrated with the relative price of nontradables with the unit cointegration vector; and (b) the real exchange rate is cointegrated with home and foreign sectoral TFP differentials. This productivity based real exchange rate model is then used to estimate the equilibrium exchange rates of the Renminbi (RMB). A comparison of the equilibrium exchange rate predicted by the productivity-based model and the actual rate indicates that the Renminbi is somewhat undervalued against the US dollar, though the undervaluation is not statistically significant. Our conclusions continue to hold even after we have controlled for the movements of net foreign assets.Nontraded Goods; Balassa-Samuelson Model; Cointegration
Does Trade Cause Capital to Flow? Evidence from Historical Rainfalls
Full text linkEstimating the effect of trade on capital flows is difficult given the inherent identification problem. We use fluctuations in rainfall to capture the exogenous variation in trade between Germany, France, the U.K., and the Ottoman Empire during 1859-1913. The provisionistic policy of the Ottoman Empire|only surplus production was exported|constitutes the basis of our identification strategy. We find that one standard deviation in rainfalls from the mean leads to a 3.5 percent increase in Ottoman exports, which in turn causes a 10 percent increase in capital inflows from the three source countries. Our findings support trade theories predicting complementarity between trade and capital flows.
Measuring the Taylor rule's performance
Full text linkUsing a recently developed econometric technique to determine how the original Taylor rule and subsequent variations perform using different measures of inflation, output and unemployment. We found that the rule remains relevant today, despite the changes wrought by globalization, financial market innovations and technological advances.
Taylor Rules and the Great Inflation: Lessons from the 1970s for the Road Ahead for the Fed
No full textCan U.S. monetary policy in the 1970s be described by a stabilizing Taylor rule with a two percent inflation target when policy is evaluated with real-time inflation and output gap data? If so, it is problematic to use the Taylor rule as a guide to good policy as the Federal Reserve implements its exit strategy from the extraordinary measures taken in 2008 and 2009 since the same policy produced the Great Inflation. Using economic research on the full employment level of unemployment and the natural rate of unemployment published between 1970 and 1977 to construct real-time output gap measures for the periods of peak unemployment, we find that the Federal Reserve did not follow a Taylor rule if appropriate measures are used. We estimate Taylor rules and find no evidence that monetary policy stabilized inflation, even allowing for changes in the inflation target. While monetary policy was stabilizing with respect to inflation forecasts, the forecasts systematically under-predicted inflation following the 1970s recessions and this does not constitute evidence of stabilizing policy. We also find that the Federal Reserve responded too strongly to negative output gaps. If the Federal Reserve stabilizes inflation and does not respond too strongly to the output gap as the recovery begins, the 2010s can be a period of good economic performance like the 1980s and 1990s rather than a repeat of the 1970s
Globalization and the changing nature of the U.S. economy's influence in the world
Full text linkGlobal economic integration may have made other countries more dependent on each other and weakened their initial responses to U.S. economic fluctuations.Globalization ; Economic conditions - United States ; International trade ; Financial crises
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