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Interest Rates, the Taylor Rule, the Quantity Equation, and the Phillips Curve

Author

Listed:
  • Guizhou Wang

    (University of Stavanger, Norway)

  • Kjell Hausken

    (University of Stavanger, Norway)

Abstract

This article combines the Taylor rule, the Friedman’s Quantity Equation, and the Phillips curve to explore how deviations in the inflation rate, real GDP, money supply, money velocity, and the unemployment rate interact with the interest rate. The motivation is to understand which factors impact the interest rate and how. Applying monthly United States data from 1 January 1959 to 31 March 2022, the contribution and findings show that the deviation in the inflation rate, the deviation in the real GDP, the deviation in the money supply, the money velocity, and the deviation in the unemployment rate are positively correlated with the interest rate. Regression analysis shows that the deviation in the inflation rate and the deviation in the real GDP are statistically positive and interact with the interest rate, consistently with Taylor. The interest rate increases with the money supply and the money velocity. Multicollinearity exists between the deviation in the real GDP and the deviation in the unemployment rate. The interest rate increases with the deviation in the unemployment rate, consistently with the Phillips curve. The deviation in the inflation rate, the deviation in the money supply, the money velocity, and the deviation in the unemployment rate are good interest rate indicators. The combination explains the interest rate more realistically than the Taylor rule.

Suggested Citation

  • Guizhou Wang & Kjell Hausken, 2022. "Interest Rates, the Taylor Rule, the Quantity Equation, and the Phillips Curve," Eurasian Journal of Economics and Finance, Eurasian Publications, vol. 10(3), pages 83-93.
    • Handle: RePEc:ejn:ejefjr:v:10:y:2022:i:3:p:83-93
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    References listed on IDEAS

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    Cited by:

    1. Guizhou Wang & Kjell Hausken, 2023. "Modeling which Factors Impact Interest Rates," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 12(2), pages 211-237.
    2. Guizhou Wang & Kjell Hausken, 2022. "A Generalized Interest Rates Model with Scaling," International Journal of Economics and Financial Issues, Econjournals, vol. 12(5), pages 143-150, September.

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