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Understanding the deviations of the Taylor rule : a new methodology with an application to Australia

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posted on 2023-06-22, 04:12 authored by Kerry Hudson, Joaquin VespignaniJoaquin Vespignani
This investigation aims to explain and quantify the deviations of the Taylor Rule. A novel three-step econometric procedure designed to reflect the data-rich environment in which central banks operate is proposed using information for 229 macroeconomic series. This procedure can be applied to data for any economy with inflation targeting monetary rule. Our application with Australian data shows that approximately 65% of Australia's deviation from the Taylor Rule can be explained systematically, with international factors and a domestic factor accounting for 41.9% and 22.5% respectively of the total variation in deviation from the rule. Australian deviation from the Taylor Rule is also associated with the deviation of the US´s Taylor Rule, indicating that the Reserve Bank of Australia appears to be following an international monetary policy trend set forth by the world's largest economy.

History

Series

Discussion Paper Series 2015‐06

Pagination

35

Publisher

University of Tasmania

Rights statement

Copyright 2015 University of Tasmania

Notes

JEL Classification: E40, E52,E50

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  • Open

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    Tasmanian School of Business and Economics

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